Strategic business management and planning
Transcript of Strategic business management and planning
1
Table of Contents 1. Understand the role of strategic planning in organizations ............................... 2
Business objectives ...................................................................................................................... 2
Decision Making Process ....................................................................................................... 3
Strategic planning ......................................................................................................................... 6
Mechanistic planning ............................................................................................................... 9
Strategy Hierarchy .................................................................................................................. 10
2. Understand the impact of internal and external factors on organizations13
Business environment ............................................................................................................... 13
Environmental Frameworks ............................................................................................... 15
Selecting Relevant Factors ................................................................................................. 15
Strategic Position ..................................................................................................................... 16
PESTEL Analysis ........................................................................................................................ 16
SWOT Analysis ........................................................................................................................... 19
MOST analysis ............................................................................................................................ 22
Governance ...................................................................................................................................... 23
Risk ....................................................................................................................................................... 28
Risk probability ......................................................................................................................... 30
3. Understand the strategies that organizations use to achieve competitive advantage
.................................................................................................................................................................... 32
Competitive advantage ............................................................................................................. 32
Strategies .......................................................................................................................................... 38
Competitive Business Strategies .................................................................................... 39
Downsizing ................................................................................................................................... 40
Market position .......................................................................................................................... 42
4. Understand the environmental factors that affect strategic business management
and planning ....................................................................................................................................... 44
Environmental factors ............................................................................................................... 44
Why Is the Location of a Business Important? ...................................................... 46
Cost of production ................................................................................................................... 47
Stakeholders ................................................................................................................................... 50
2
1. Understand the role of strategic planning in organizations
Business objectives
Your business objectives are the results you hope to achieve and maintain as you run and grow
your business. As an entrepreneur, you are concerned with every aspect of your business and
need to have clear goals in mind for your company. Having a comprehensive list of business
objectives creates the guidelines that become the foundation for your business planning.
Customer Service
Good customer service helps you retain clients and generate repeat revenue. Keeping your
customers happy should be a primary objective of your organization.
Employee Retention
Employee turnover costs you money in lost productivity and the costs associated with recruiting,
which include employment advertising and paying placement agencies. Maintaining a productive
and positive employee environment improves retention, according to the Dun and Bradstreet
website.
Core Values
Your company mission statement is a description of the core values of your company, according
to the Dun and Bradstreet website. It is a summary of the beliefs your company holds in regard
to customer interaction, responsibility to the community and employee satisfaction. The
company's core values become the objectives necessary to create a positive corporate culture.
Growth
Growth is planned based on historical data and future projections. Growth requires the careful use
of company resources such as finances and personnel, according to Tim Berry, writing on the
"Entrepreneur" website.
Maintain Financing
Even a company with good cash flow needs financing contacts in the event that capital is needed
to expand the organization, according to Tim Berry, writing on the "Entrepreneur" website.
Maintaining your ability to finance operations means that you can prepare for long-term projects
and address short-term needs such as payroll and accounts payable.
3
Change Management
Change management is the process of preparing your organization for growth and creating
processes that effectively deal with a developing marketplace. The objective of change
management is to create a dynamic organization that is prepared to meet the challenges of your
industry.
Marketing
Marketing is more than creating advertising and getting customer input on product changes. It is
understanding consumer buying trends, being able to anticipate product distribution needs and
developing business partnerships that help your organization to improve market share.
Competitive Analysis
A comprehensive analysis of the activities of the competition should be an ongoing business
objective for your organization. Understanding where your products rank in the marketplace helps
you to better determine how to improve your standing among consumers and improve your
revenue.
Decision Making Process
Making decisions in a company or organization happens at all levels. A manager of a business
shouldn’t assume he’s right in every decision he has to make. In that regard, different types of
decision-making should be taken depending on the situation at hand.
Identifying Problems
Before making any decision, the organization has to identify exactly what the problem is. Not
identifying the problem could lead to an erroneous decision. The leader of an organization should
evaluate the issue with all employees so everyone knows about it, and then make a decision that
taps into what's worked before if that decision process is right for solving the issue. This form of
decision-making can be made into a computer program with a set pattern of rules to follow in
amending a problem.
Multiple Perspective Analysis
Sometimes using multiple perspective analysis to make a decision is best so a CEO or manager
can force herself out of her usual method of thinking. Professor Hossein Arsham, in an article titled
“Leadership Decision Making” at the University of Baltimore site, notes this method and its steps.
By wearing six different “hats,” you can make a decision using different thinking approaches. For
4
instance, a red hat uses reaction and emotion, or being aware of how other people will react when
the decision is made. A green hat will use freewheeling creativity in making a decision. The article
also notes that a decision can be made using differing points of view from customers or those in
different professions.
Short-Term Decisions
Another decision method is the short-term method, or operational decisions. These decisions
usually solve a problem in the immediate term through the action of employees. The method to
this involves practical steps for a quicker outcome. For example, it could be choosing a particular
delivery service to deliver products to the organization’s customers.
Following Up and Feedback
After an organization has made a decision, the manager or CEO needs to follow up on it to make
sure it was implemented correctly. Communication with every employee involved in implementing
the decision is important in this scenario. Additionally, a leader of an organization should get
feedback from those directly affected by the decision. By doing so, the organization can know
whether the decision was the right one. This helps in gauging how to make future important
business decisions.
Strategic planning
Strategic planning is critical to business success. Different from classic business planning, the
strategic variety involves vision, mission and outside-of-the-box thinking. Strategic planning
describes where you want your company to go, not necessarily how you're going to get there.
However, like all other "travel plans," without knowing where you want to go, creating details on
how to arrive are meaningless. Strategic planning defines the "where" that your company is
heading.
Function
Often confused with business operation plans, strategic plans are expressions of ownership dreams
and visions of successful results. Strategic planning functions as the "design" just as a blueprint
functions as the "how" to build something. The strategic plan displays the finished product or goal.
Usually, in smaller businesses, strategic planning is focused on the overall company, not on a
department or division.
5
Improvise
Unlike business plans, there is no one right way to create effective strategic planning. It is, by
definition, brainstorming at its best. Strategic planning involves "feel" just as much as it depends
on management science. Since it depends on creativity and outside-the-box thinking, there is no
perfect way to design a winning strategic plan. The more you understand your company, your
industry, and your corporate "wish list," the better a winning strategic plan you'll create.
Use SWOT Analysis
A SWOT -- strengths, weaknesses, opportunities, and threats -- analysis is a wonderful way to
prepare for developing a strategic plan. Identifying these four critical components of your company
existence is often the primary building block of strategic plans. Many Fortune 500 companies use
SWOT analyzes as the basis of their strategic planning activities. You can use this technique as
the foundation for strategic goals for your smaller business just as effectively.
Strategies Equal Methods
Envisioning goals and then defining strategies you'll embrace to achieve your objectives is the true
essence of strategic planning. Easy to overlook in a smaller business, strategic thinking identifies
the methods you will take to reach your goals. For example, if you believe you must expand your
e-commerce function to achieve increased sales volume, you've also identified the method to use
your strategy and reach company goals. Save the specific steps and components for your business
plan. By selecting the strategy, you have defined the method to employ in your detailed
specifications in your business plan.
Strategy Defines Action
As critical as business planning is to the success of your company, all plans are useless unless
followed by action. An additional side benefit of strategic planning is the natural action plan that
stems from identifying your preferred strategy. While strategic planning involves your vision,
mission and dreams, it also further defines the rudiments of your action plan to achieve the results
you want. For example, if you adopt a strategy of increasing business-to-business -- B2B --
revenue, you've also identified a basic action plan.
6
Strategic planning
A strategic plan is a document that establishes the direction of a company or work unit. It can be
a single page or fill up a binder, depending on the size and complexity of the business and work.
Most managers would benefit from having their own strategic plan. The process of developing a
plan helps the manager (and the team) step back and examine where they are, where they want
to go, and how to get there.
In the absence of a plan, work still gets done on a day-to-day basis but often lacks a sense of
purpose and priority.
Here is a template for a basic, simplified strategic plan that any manager can fill out, providing
both long-term purpose and direction and tactical operating plans.
While a manager could certainly complete the template alone, I recommend a more collaborative
approach.
Vision Statement
A vision statement is an aspirational statement of where you want your unit to be in the future.
“Future” is usually defined as the next three to five years, but it could be more. A vision should
set the overall direction for the unit and team and should be bold and inspirational. A vision
describes the “what” and the “why” for everything you do.
Here is an example vision statement from Zappos: “One day, 30 percent of all retail transactions
in the US will be online. People will buy from the company with the best service and the best
selection.
Zappos.com will be that online store. Our hope is that our focus on service will allow us to wow
our customers, our employees, our vendors, and our investors. We want Zappos.com to be known
as a service company that happens to sell shoes, handbags, and anything and everything.”
Mission Statement
While a vision describes where you want to be in the future, a mission statement describes what
you do today.
7
It often describes what you do, for who, and how. Focusing on your mission each day should
enable you to reach your vision. A mission statement could broaden your choices, and/or narrow
them.
Here is an example of a mission statement from Harley-Davidson: “We fulfill dreams through the
experience of motorcycling, by providing motorcyclists and the general public with an expanding
line of motorcycles and branded products and services in selected market segments.”
A vision and mission can also be combined in the same statement. Here is an example from Walt
Disney Company: “The mission of The Walt Disney Company is to be one of the world's leading
producers and providers of entertainment and information. Using our portfolio of brands to
differentiate our content, services, and consumer products, we seek to develop the most creative,
innovative, and profitable entertainment experiences and related products in the world.”
Note that the statement is both aspirational (“to be one of the…”) and descriptive of what they do
and how they do it.
Core Values
Core values describe your beliefs and behaviors. They are the things that you believe in that will
enable you to achieve your vision and mission.
Here is an example of core values from the Coca-Cola Company:
Leadership: The courage to shape a better future
Collaboration: Leverage collective genius
Integrity: Be real
Accountability: If it is to be, it's up to me
Passion: Committed in heart and mind
Diversity: As inclusive as our brands
Quality: What we do, we do well
SWOT Analysis
SWOT stands for strengths, weaknesses, opportunities, and threats. A SWOT analysis sums up
where you are now and provides ideas on what you need to focus on.
8
Long-Term Goals
Long-term goals are three to five statements that drill down a level below the vision and describe
how you plan to achieve your vision.
Yearly Objectives
Each long-term goal should have a few (three to five) one year objectives that advance your goals.
Each objective should be as “SMART” as possible: Specific, Measurable, Achievable, Realistic, and
Time-based.
Action Plans
Each objective should have a plan that details how the objective will be achieved. The amount of
detail depends on the complexity of the objective.
Note that the strategic plan starts at the highest level (vision) and then gets more specific, short
term, and specific. Both are important.
It’s been said that “A vision without a plan is just a dream. A plan without a vision is just drudgery.
But a vision with a plan can change the world.”
Goals – based planning
Traditionally, many advisors have been focused on a single goal shared by all individuals—retiring
comfortably. But, in some circles, a new approach is taking hold to recognize that investors need
a far more personalized approach. This new breed of advisors is working with clients to take a
more holistic, total wealth approach that prioritizes all of their goals—beyond just retirement—and
helps ensure that they are achieved.
What exactly is goals-based planning?
Goals-based planning is the process of helping clients prioritize their financial goals and determine
the optimal plan to fund them. Goals-based planning expands your focus into all aspects of your
clients financial life and eliminates the retirement-only focus.
What is the advantage of goals-based planning?
A new report from David Blanchett, head of retirement research for Morningstar Investment
Management, finds that goals-based planning can lead to a 15%* increase in utility-adjusted
9
wealth when compared to a traditional approach to financial planning. To learn more about the
benefits of goals based planning explore this microsite.
Mechanistic planning
A mechanistic model assumes that a complex system can be understood by examining the
workings of its individual parts and the manner in which they are coupled. Mechanistic models
typically have a tangible, physical aspect, in that system components are real, solid and visible.
However, some mechanistic models, such as those in psychology, are based on components that
are considered discrete, but cannot be physically observed.
Models
A model is a description of a system designed to help an observer to understand how it works and
to predict its behavior. Models are typically conceptual, existing as an idea, a computer program
or a set of mathematical formulas. However, a model can be an actual physical object, such as a
small-scale airplane model used to test the performance of a full-size airplane.
Mechanistic and Empirical Models
Empirical models are based on direct observation, measurement and extensive data records.
Mechanistic models are based on an understanding of the behavior of a system's components. For
example, you can observe the change of the tides over many years, and construct an empirical
model that allows you to predict when tides will occur, with no understanding of how the earth,
moon and sun interact. You can also create a mathematical, mechanistic model that uses the laws
of physics to predict tides.
Industry
Industrial engineers use models to predict the behavior of the processes they are designing. A
chemical engineer, for example, can create a mechanistic model of a process based on her
understanding of system components such as distilling columns, reactor chambers and particle
filters.
Social Scientists
Social scientists also create mechanistic models to describe how individuals function, either on
their own or in complex social settings. Mechanistic models of behavior identify discrete drives
such as hunger or sexual desire that researchers use to describe and try to explain human
10
behavior. Mechanistic models can also attempt to explain human behavior in terms of biochemical
events in the brain and body.
Strategy Hierarchy
Hierarchy of strategies describes a layout and relations of global strategy and sub-strategies of
the organization.
Hierarchy of strategies describes a layout and relations of corporate strategy and sub-
strategies of the organization. Individual strategies are arranged hierarchically and logically
consistent at the level of vision, mission, goals and metrics.
Sometimes the designation logical framework of strategic planning and management is used.
Methods used in strategic planning: top-down, bottom-up and bidirectional planning.
Hierarchy of Strategies of an organization may look like this:
11
The three levels of strategy for a company are corporate, business and functional. Corporate
strategy focuses on determining which businesses the company should be in. Business strategy
develops competitive advantages within a businesses segment. Functional strategy operates at
the level of marketing, operations and finance to ensure that each part of the company has
strategies to support the business. For single-business companies, corporate strategy consists of
continuously evaluating the benefits of remaining in a single business versus becoming active in
complementary industries.
Corporate Strategy
Single-business companies have the advantage of focus and rapid response but are vulnerable to
problems in their industry. Their corporate strategy must demonstrate the advantages of
remaining active in only one industry while evaluating business opportunities in areas with
complementary activities. With a goal of optimizing company operations, profitability and growth,
the corporate strategy must compare the return of a continuing investment in the single business
with the acquisition or starting up of complementary businesses.
Business Strategy
The business strategy of a single-business company is similar to that of a business unit of a
diversified company except that the business strategy must support corporate strategic initiatives
aimed at the single business. The business strategy sets goals for performance, evaluates the
actions of competitors and specifies actions the company must take to maintain and improve its
competitive advantages. Typical strategies are to become a low-price leader, to achieve
differentiation in quality or other desirable features or to focus on promotion.
Marketing Functional Strategy
In companies that are marketing oriented, the marketing strategy on a functional level influences
the other functions and their strategies. A typical marketing strategy is to determine customer
needs in an area where the company has a natural competitive advantage. Such advantages might
be in location, facilities, reputation or staffing. Once the marketing strategy has identified the kind
of product customers want, it passes the information to operations to design and produce such a
product at the required cost. The advertising department must develop a promotional strategy,
sales must sell the product and customer service must support it. The marketing strategy forms
the basis for the strategies of these other departments.
12
Other Functional Strategies
The non-marketing functional strategies must support the marketing strategy that, in turn, is a
component of the overall business strategy. In a single-business company, those strategies are
tightly focused on one industry, but they must also deliver data that allows the corporate strategy
to examine possible diversification. Single-business companies are usually either highly ranked in
their single business or dominant in their niche. The strategies at the functional level try to
maintain such a position but also look for external danger signs. If events outside the company's
control lead to a deterioration of its position, strategic components from a functional level must
signal to the corporate level that an implementation of alternative strategies is required.
13
2. Understand the impact of internal and external factors on
organizations
Business environment
Your business doesn't exist in a vacuum. The world around you influences your chance of success.
So does your company's internal environment. A business concept that looks perfect on paper
may prove imperfect in the real world. Sometimes failure is due to the internal environment – the
company's finances, personnel or equipment. Sometimes it's the environment surrounding the
company. Knowing how internal and external environmental factors affect your company can help
your business thrive.
External: The Economy
In a bad economy, even a well-run business may not be able to survive. If customers lose their
jobs or take jobs that can barely support them, they'll spend less on sports, recreation, gifts,
luxury goods and new cars. High interest rates on credit cards can discourage customers from
spending. You can't control the economy, but understanding it can help you spot threats and
opportunities.
Internal: Staff
Unless you're a one-person show, your employees are a major part of your company's internal
environment. Your employees have to be good at their jobs, whether it's writing code or selling
products to strangers. Managers have to be good at handling lower-level employees and
overseeing other parts of the internal environment. Even if everyone's capable and talented,
internal politics and conflicts can wreck a good company.
External: Competition
Unless your company is unique, you'll have to deal with competition. When you start your
company, you fight against established, more experienced businesses in the same industry. After
you establish yourself, you'll eventually have to face newer firms that try to slice away your
customers. Competition can make or break you – look at how many brick-and-mortar bookstores
crashed and burned competing with Amazon.
Internal: Money
14
Even in a great economy, lack of money can determine whether your company survives or dies.
When your cash resources are too limited, it affects the number of people you can hire, the quality
of your equipment, and the amount of advertising you can buy. If you're flush with cash, you have
a lot more flexibility to grow and expand your business or endure an economic downturn.
External: Politics
Changes in government policy can have a huge effect on your business. The tobacco industry is a
classic example. Since the 1950s, cigarette companies have been required to place warning labels
on their products, and they lost the right to advertise on television. Smokers have fewer and fewer
places they can smoke legally. The percentage of Americans who smoke has dropped by more
than half, with a corresponding effect on industry revenues.
Internal: Company Culture
Your internal culture consists of the values, attitudes and priorities that your employees live by. A
cutthroat culture where every employee competes with one another creates a different
environment from a company that emphasizes collaboration and teamwork. Typically, company
culture flows from the top down. Your staff will infer your values based on the type of people you
hire, fire and promote. Let them see the values you want your culture to embody.
External: Customers and Suppliers
Next to your employees, your customers and suppliers may be the most important people you
deal with. Suppliers have a huge impact on your costs. The clout of any given supplier depends
on scarcity: If you can't buy anywhere else, your negotiating room is limited. The power of your
customers depends on how fierce the competition for their dollars is, how good your products are,
and whether your advertising makes customers want to buy from you, among other things.
Environmental Business Analysis
Environmental business analysis is a catchall term given to the systematic process by which
environmental factors in a business are identified, their impact is assessed and a strategy is
developed to mitigate and/or take advantage of them. While frameworks do exist to aid in
environmental analysis, it is important to understand that they are simply frameworks to orient
the user toward a more precise understanding of the business environment; they are by no means
15
necessary. Rather, it is important to understand the business environment, the universal processes
used in analysis and how analysis is converted into strategy.
Analysis Process
Any business manager should be able to analyze the environment in which the company does
business. The general process used to analyze the business environment has four basic steps.
First, the environment is scanned for environmental factors. Next, the relevant factors are culled
and monitored. Then, those factors are analyzed for impact. Lastly, scenarios are forecast based
upon the environmental factors identified and strategies developed accordingly. Further, as
strategies are implemented, the business environment is monitored so that any unforeseen
changes can be accounted for.
Identifying Environmental Factors
Identifying environmental factors is most commonly done by brainstorming. All environmental
factors are not always obvious to everyone and the more people included, especially in this initial
brainstorming, the more accurate the environmental profile developed will be. Common
environmental factors include new tax laws, tariff limits, export laws, consumer trends, developing
technology, new replacement products (i.e., the iPod to the CD player), laws concerning emissions,
or a new competitor.
Environmental Frameworks
Several popular frameworks exist to aid in identifying environmental factors. They are
frequently used together. The first is PEST or PESTEL analysis, which looks at the political,
economic, social and technological factors affecting a business; sometimes environmental
and legal are included. Secondly, SWOT analysis is used. This is a framework that looks
at the strengths, weaknesses, opportunities and threats affecting a business, both
internally and externally. Lastly, the Five Forces are considered: internal forces, external
forces, competitors, new entrants and producers of complementary products/services.
Selecting Relevant Factors
Only the most relevant environmental factors identified should be given further analysis.
All factors are not equally relevant; for example, certain tax laws will affect the business
but really require little additional analysis compared to the threat posed by a competitor.
16
Further, it is important to try to quantify the effect of the environmental factors identified.
Quantification will allow the true impact to be assessed and compared historically and in
the future.
Strategic Position
After carefully identifying and quantifying those environmental factors most relevant to
the future success of a company, assumptions are made regarding the future development
of those factors and a strategy formed. Methods to accomplish this will vary, but all good
plans will have the common feature of a monitoring/feedback mechanism and a system
to update the strategy accordingly, such as a monthly review.
PESTEL Analysis
A PESTEL analysis is a framework or tool used by marketers to analyze and monitor the macro-
environmental (external marketing environment) factors that have an impact on an organisation.
The result of which is used to identify threats and weaknesses which is used in a SWOT analysis.
PESTEL stands for:
P – Political
E – Economic
S – Social
T – Technological
E – Environmental
L – Legal
17
Lets look at each of these macro-environmental factors in turn.
All the external environmental factors (PESTEL factors)
Political Factors
These are all about how and to what degree a government intervenes in the economy. This can
include – government policy, political stability or instability in overseas markets, foreign trade
policy, tax policy, labour law, environmental law, trade restrictions and so on.
It is clear from the list above that political factors often have an impact on organisations and how
they do business. Organisations need to be able to respond to the current and anticipated future
legislation, and adjust their marketing policy accordingly.
Economic Factors
Economic factors have a significant impact on how an organisation does business and also how
profitable they are. Factors include – economic growth, interest rates, exchange rates, inflation,
disposable income of consumers and businesses and so on.
These factors can be further broken down into macro-economical and micro-economical factors.
Macro-economical factors deal with the management of demand in any given economy.
Governments use interest rate control, taxation policy and government expenditure as their main
mechanisms they use for this.
18
Micro-economic factors are all about the way people spend their incomes. This has a large impact
on B2C organisations in particular.
Social Factors
Also known as socio-cultural factors, are the areas that involve the shared belief and attitudes of
the population. These factors include – population growth, age distribution, health consciousness,
career attitudes and so on. These factors are of particular interest as they have a direct effect on
how marketers understand customers and what drives them.
Technological Factors
We all know how fast the technological landscape changes and how this impacts the way we
market our products. Technological factors affect marketing and the management thereof in three
distinct ways:
New ways of producing goods and services
New ways of distributing goods and services
New ways of communicating with target markets
Environmental Factors
These factors have only really come to the forefront in the last fifteen years or so. They have
become important due to the increasing scarcity of raw materials, polution targets, doing business
as an ethical and sustainable company, carbon footprint targets set by governments (this is a
good example were one factor could be classes as political and environmental at the same time).
These are just some of the issues marketers are facing within this factor. More and more
consumers are demanding that the products they buy are sourced ethically, and if possible from
a sustainable source.
Legal Factors
Legal factors include - health and safety, equal opportunities, advertising standards, consumer
rights and laws, product labelling and product safety. It is clear that companies need to know what
is and what is not legal in order to trade successfully. If an organisation trades globally this
becomes a very tricky area to get right as each country has its own set of rules and regulations.
After you have completed a PESTEL analysis you should be able to use this to help you identify
the strengths and weaknesses for a SWOT analysis.
19
SWOT Analysis
SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for
identifying both the Opportunities open to you and the Threats you face.
Used in a business context, it helps you carve a sustainable niche in your market. Used in
a personal context, it helps you develop your career in a way that takes best advantage of your
talents, abilities and opportunities.
Business SWOT Analysis
What makes SWOT particularly powerful is that, with a little thought, it can help you uncover
opportunities that you are well-placed to exploit. And by understanding the weaknesses of your
business, you can manage and eliminate threats that would otherwise catch you unawares.
More than this, by looking at yourself and your competitors using the SWOT framework, you can
start to craft a strategy that helps you distinguish yourself from your competitors, so that you can
compete successfully in your market.
How to Use the Tool
Originated by Albert S. Humphrey in the 1960s, the tool is as useful now as it was then. You can
use it in two ways – as a simple icebreaker helping people get together to "kick off" strategy
formulation, or in a more sophisticated way as a serious strategy tool.
Strengths
What advantages does your organization have?
What do you do better than anyone else?
What unique or lowest-cost resources can you draw upon that others can't?
What do people in your market see as your strengths?
What factors mean that you "get the sale"?
What is your organization's Unique Selling Proposition (USP)?
Consider your strengths from both an internal perspective, and from the point of view of your
customers and people in your market.
20
Also, if you're having any difficulty identifying strengths, try writing down a list of your
organization's characteristics. Some of these will hopefully be strengths!
When looking at your strengths, think about them in relation to your competitors. For example, if
all of your competitors provide high quality products, then a high quality production process is not
a strength in your organization's market, it's a necessity.
Weaknesses
What could you improve?
What should you avoid?
What are people in your market likely to see as weaknesses?
What factors lose you sales?
Again, consider this from an internal and external perspective: Do other people seem to perceive
weaknesses that you don't see? Are your competitors doing any better than you?
It's best to be realistic now, and face any unpleasant truths as soon as possible.
Opportunities
What good opportunities can you spot?
What interesting trends are you aware of?
Useful opportunities can come from such things as:
Changes in technology and markets on both a broad and narrow scale.
Changes in government policy related to your field.
Changes in social patterns, population profiles, lifestyle changes, and so on.
Local events.
21
Threats
What obstacles do you face?
What are your competitors doing?
Are quality standards or specifications for your job, products or services changing?
Is changing technology threatening your position?
Do you have bad debt or cash-flow problems?
Could any of your weaknesses seriously threaten your business?
Further SWOT Tips
If you're using SWOT as a serious tool (rather than as a casual "warm up" for strategy
formulation), make sure you're rigorous in the way you apply it:
Only accept precise, verifiable statements ("Cost advantage of $10/ton in sourcing raw
material x", rather than "Good value for money").
Ruthlessly prune long lists of factors, and prioritize them, so that you spend your time
thinking about the most significant factors.
Make sure that options generated are carried through to later stages in the strategy
formation process.
Apply it at the right level – for example, you might need to apply the tool at a product or
product-line level, rather than at the much vaguer whole company level.
Use it in conjunction with other strategy tools (for example, USP Analysis and Core
Competence Analysis) so that you get a comprehensive picture of the situation you're
dealing with.
22
MOST analysis
M.O.S.T. analysis is a highly-structured method for providing targets to team members at every
level of an organisation. Working from the top down, it ensures that you retain focus on the goals
which matter most to your organisation.
As a system, it breaks down the communication barriers between different levels on the same
team by asking at every stage “How does this help us reach our next level of targets?” In this
way, every tactic employed has to be justified in terms of reaching strategies, which in turn must
contribute to objectives, which must, finally, contribute to your mission.
For example, the tactic of decreasing the number of stock checks a sales assistant has to carry
out contributes to the strategy of increasing the number of sales assistants on the shop floor at
any one time. This strategy helps the company to reach its objective of helping customers in the
shop as soon as a problem arises, which contributes to the mission, selling more products.
The analysis can be applied to many areas of a business, from its most obvious applications in
sales, marketing and business growth to internal processes and human resources.
Mission
Every organisation is different, and we can make no assumptions about what its mission might be
without asking the right questions. Profitability, for instance, is explicitly not the mission of a non-
profit organisation.
Even with for-profit organisations, you cannot assume that profit as an end goal. Under Jeff Bezos,
Amazon has focused on razor-thin margins with as little profit as possible in exchange for huge
amounts of market share.
A good mission is ambitious and essential to broader business success. It could even be the entire
reason for the organisation’s existence. Once it has been established, the rest of the M.O.S.T.
analysis can begin.
Missions should be reviewed when they have succeeded or found to be flawed.
Objectives
Each objective should be a contributing condition for the mission’s success. This means that an
objective achieved will make the mission target easier to reach, but they might not be essential
to reach your mission.
23
Objectives should be Specific, Measurable, Achievable, Realistic and Timely (S.M.A.R.T.),
otherwise goal-creep will set in and objectives will become fuzzy and difficult to implement.
A good objective sets a clear target to achieve within a tight time-frame. Ideally, it will complement
your other objectives to compound successes across the M.O.S.T. analysis.
Objectives should be reviewed if they are found not to help the mission.
Strategies
Strategies are the options open to achieve objectives. These may be quite complex, involving
many tactics, and they may overlap to an extent. Strategies are an implementation detail.
Strategies offer a way to quickly review and group the tactics implemented on the ground floor,
so they make sense as methods to achieve your objectives.
If strategies do not accurately describe the tactics being used, or do not work directly towards
your objectives, you should review them.
Tactics
Tactics are the methods you will use to carry out your strategies. They should be simple and
relatively discrete processes that can easily be understood and carried out even by people who
don’t have a high-level overview of the M.O.S.T. analysis.
A good tactic is small and S.M.A.R.T. With effective tactics, your strategies will quickly lead to
completed objectives.
If your tactics are inefficient and complex in practice, or there are unexpected obstacles to
implementing them successfully, they should be reviewed.
Governance
Corporate governance is the system of rules, practices and processes by which a company is
directed and controlled. Corporate governance essentially involves balancing the interests of a
company's many stakeholders, such as shareholders, management, customers, suppliers,
financiers, government and the community. Since corporate governance also provides the
framework for attaining a company's objectives, it encompasses practically every sphere of
management, from action plans and internal controls to performance measurement and
corporate disclosure.
24
!--break--Governance refers specifically to the set of rules, controls, policies and resolutions put
in place to dictate corporate behavior. Proxy advisors and shareholders are important stakeholders
who indirectly affect governance, but these are not examples of governance itself. The board of
directors is pivotal in governance, and it can have major ramifications for equity valuation.
The Board of Directors
The board of directors is the primary direct stakeholder influencing corporate governance.
Directors are elected by shareholders or appointed by other board members, and they represent
shareholders of the company. The board is tasked with making important decisions, such as
corporate officer appointments, executive compensation and dividend policy. In some instances,
board obligations stretch beyond financial optimization, when shareholder resolutions call for
certain social or environmental concerns to be prioritized.
Boards are often comprised of inside and independent members. Insiders are major shareholders,
founders and executives. Independent directors do not share the ties of the insiders, but they are
chosen because of their experience managing or directing other large companies. Independents
are considered helpful for governance, because they dilute the concentration of power and help
align shareholder interest with those of the insiders.
Good and Bad Governance
Bad corporate governance can cast doubt on a company's reliability, integrity or obligation to
shareholders. Tolerance or support of illegal activities can create scandals like the one that rocked
Volkswagen AG in 2015. Companies that do not cooperate sufficiently with auditors or do not
select auditors with the appropriate scale can publish spurious or noncompliant financial results.
Bad executive compensation packages fail to create optimal incentive for corporate officers. Poorly
structured boards make it too difficult for shareholders to oust ineffective incumbents. Corporate
governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in
the United States, which was ushered in to restore public confidence in companies and markets
after accounting fraud bankrupted high-profile companies such as Enron and WorldCom.
Good corporate governance creates a transparent set of rules and controls in which shareholders,
directors and officers have aligned incentives. Most companies strive to have a high level of
corporate governance. For many shareholders, it is not enough for a company to merely be
profitable; it also needs to demonstrate good corporate citizenship through environmental
awareness, ethical behavior and sound corporate governance practices.
25
Business leadership
The four fundamental factors of production are land, labor, capital and entrepreneurship. The final
factor belies the vital importance of leadership in business settings. Leadership acts as the catalyst
that makes all other elements work together; without leadership, all other business resources lie
dormant. Savvy business leaders are in tune with the needs and issues of their subordinates, and
keep up to date on new developments in leadership theory and methodology to maximize their
effectiveness.
Significance
A leaderless organization is like an army without generals. Work forces need the leadership of
skilled and experienced individuals to provide guidance and a single direction for all employees to
follow. Leaders are invaluable when it comes to formulating and communicating new strategic
directions, as well as communicating with and motivating employees to increase dedication to
organizational goals.
Functions
Business leaders serve a range of important functions in their organizations. Leaders are
responsible for training employees to perform their tasks effectively, as well as supervising the
actual completion of those tasks on a regular basis. Leaders must inspire employees to get excited
about the company and their work, pushing them to excel and helping them along the way.
Leaders are also tasked with protecting the employees under their supervision from internal and
external threats, including everything from political backstabbing to physical security.
Types
Different leaders employ different leadership styles. Leaders with a command and control style
formulate ideas on their own and dictate actions to their employees. Collaborative leaders come
up with ideas with the assistance of employees from all levels of the organization, leveraging
employees' creativity to boost company performance. Facilitative leaders delegate almost all
productive tasks to subordinates, and focus on providing their employees with everything they
need to excel in their jobs. Business owners' leadership styles are extremely important in crafting
company culture.
Delegation
Delegation, the act of assigning productive tasks to subordinates, is vital to success as a business
leader. More important than delegating individual tasks, however, is the ability to delegate
26
authority and develop leaders for the future. Assigning tasks is a basic management activity;
assigning responsibility for figuring out how to accomplish objectives takes management to the
next level. It is important to develop leaders to partner with you in the future as your business
grows; this can greatly increase employee satisfaction and loyalty as well.
Considerations
Leaders and leadership styles may need to be changed to suit specific situations. A new CEO in an
established company, for example, may benefit from altering his leadership style to be more in
line with the culture of his new company. Top executives themselves may need to be switched out
from time to time if a company's performance establishes a pattern of decline.
Long term planning
Long-term business planning is done in recognition of the fact that reaching some of the company’s
goals can require an effort undertaken over a number of years, with many steps that must be
completed along the way. In contrast, the company’s annual plan is focused on how to allocate
the company’s financial and human resources only for the next year. The annual plan has much
more detailed financial projections than the long-term plan, which is more of a statement of
general strategic direction.
1. Define what long-term means for your organization. Industrial technology companies may need
to do a long-term plan that spans five to seven years because of the complex development steps
involved in bringing new technologies to a marketable stage. For a clothing designer, a three-year
look into the future may be as long as is feasible because fashion trends change so quickly. Choose
a time frame that represents the time required to take your company to the next level of success.
2. Develop a system for uncovering new opportunities. Take a systematic approach to gathering
data about trends in your industry or trends in other industries you may want to enter over the
long term. Make it an ongoing process.
3. Develop a long-term vision. Imagine it is five years in the future and you are visiting your
company. Describe how large it has become in terms of generating revenues, how many people
now work at the company, how the scope of its product line has changed and how it has expanded
geographically.
4. Create long-term objectives. Convert your vision into numbers, such as what revenues are
projected to be five years from now.
27
A hotel company would have a long-term objective for the number of properties it will own or
manage five years down the road. The objectives don’t need to be as numerous as those in the
annual plan. Think of them as strategic pillars for your company’s long-term future.
5. Select the long-term opportunities to concentrate on based on your data gathering and your
long-term vision. Decide on the new markets you want to explore, and the new products or
services you want to develop. These opportunities are your long-term projects. Assign
responsibility for moving each project forward to members of your management team.
6. Create action plans for each of the projects. Determine, in a broad sense, what needs to be
accomplished each year on each of the projects over the time horizon of the long-term plan.
Short, mid and long term planning
The different time frames of the short, medium and long-term planning processes place the focus
on time-sensitive aspects of the company's structure and environment. You can differentiate
planning based on the time frames of the inputs and expected outcomes. Business owners develop
plans to reach their overall goals, and they usually find it useful to separate planning into phases.
This allows you to track immediate improvements while evaluating progress toward eventual goals
and targets. The different time frames of the planning process place the focus on time-sensitive
aspects of the company's structure and environment. You can differentiate planning based on the
time frames of the inputs and expected outcomes.
Planning Characteristics
Many businesses develop strategic planning within a short-term, medium-term and long-term
framework. Short-term usually involves processes that show results within a year. Companies aim
medium-term plans at results that take several years to achieve. Long-term plans include the
overall goals of the company set four or five years in the future and usually are based on reaching
the medium-term targets. Planning in this way helps you complete short-term tasks while keeping
longer-term goals in mind.
Short-Term Planning
Short-term planning looks at the characteristics of the company in the present and develops
strategies for improving them. Examples are the skills of the employees and their attitudes. The
condition of production equipment or product quality problems are also short-term concerns. To
address these issues, you put in place short-term solutions to address problems. Employee training
28
courses, equipment servicing and quality fixes are short-term solutions. These solutions set the
stage for addressing problems more comprehensively in the longer term.
Medium-Term Planning
Medium-term planning applies more permanent solutions to short-term problems. If training
courses for employees solved problems in the short term, companies schedule training programs
for the medium term. If there are quality issues, the medium-term response is to revise and
strengthen the company's quality control program. Where a short-term response to equipment
failure is to repair the machine, a medium-term solution is to arrange for a service contract.
Medium-term planning implements policies and procedures to ensure that short-term problems
don't recur.
Long-Term Planning
In the long term, companies want to solve problems permanently and to reach their overall
targets. Long-term planning reacts to the competitive situation of the company in its social,
economic and political environment and develops strategies for adapting and influencing its
position to achieve long-term goals. It examines major capital expenditures such as purchasing
equipment and facilities, and implements policies and procedures that shape the company's profile
to match top management's ideas. When short-term and medium-term planning is successful,
long-term planning builds on those achievements to preserve accomplishments and ensure
continued progress.
Risk
Risk means that there is a chance that you won’t receive a return on your investment. It is an
exposure to danger to your bottom line. When you are in business, you need to consider the kinds
of events that could pose a risk to your business and take steps to mitigate them.
Strategic Risk
Strategic risks result directly from operating within a specific industry at a specific time. So shifts
in consumer preferences or emerging technologies that make your product-line obsolete – eight-
track, anyone? – or other drastic market forces can put your company in danger. To counteract
strategic risks, you’ll need to put measures in place to constantly solicit feedback so changes will
be detected early.
29
Compliance Risk
Risks associated with compliance are those subject to legislative or bureaucratic rule and
regulations, or those associated with best practices for investment purposes. These can include
employee protection regulations like those imposed by the Occupational Safety and Health
Administration (OSHA), or environmental concerns like those covered by the Environmental
Protection Agency (EPA) or even state and local agencies.
Financial Risk
Direct financial risks have to do with how your business handles money. That is, which customers
do you extend credit to and for how long? What is your debt load? Does most of your income come
from one or two clients who might not be able to pay? Financial risks also take into account interest
rates and if you do international business, foreign exchange rates.
Operational Risks
Operational risks result from internal failures. That is, your business’s internal processes, people
or systems fail unexpectedly. Therefore, unlike a strategic risk or a financial risk, there is no return
on operational risks.
Operational risks can also result from unforeseen external events such as transportation systems
breaking down, or a supplier failing to deliver goods.
Reputational Risk
Loss of a company’s reputation or community standing might result from product failures, lawsuits
or negative publicity. Reputations take time to build but can be lost in a day. In this era of social
networking, a negative Twitter posting by a customer can reduce earnings overnight. A negative
blog post or a bad product review can occasionally spread like wildfire online, quickly thrusting a
company into damage-control mode.
Other Risks
Other risks are more difficult to categorize. They include risks from the environment, such as
natural disasters. Difficulties in maintaining a trained staff that has up-to-date skills to operate
your business is sometimes called employee risk management. Health and safety risks not covered
by OSHA or state agencies fall into this category as do political and economic instability in countries
you import from or export to.
30
Risk probability
Probabilistic risk assessment (PRA) is a systematic and comprehensive methodology to
evaluate risks associated with a complex engineered technological entity (such as an airliner or
a nuclear power plant) or the effects of stressors on the environment (Probabilistic Environmental
Risk Assessment - PERA) for example.
Risk in a PRA is defined as a feasible detrimental outcome of an activity or action. In a PRA, risk
is characterized by two quantities:
1. the magnitude (severity) of the possible adverse consequence(s), and
2. The likelihood (probability) of occurrence of each consequence.
Consequences are expressed numerically (e.g., the number of people potentially hurt or killed)
and their likelihoods of occurrence are expressed as probabilities or frequencies (i.e., the number
of occurrences or the probability of occurrence per unit time). The total risk is the expected loss:
the sum of the products of the consequences multiplied by their probabilities.
The spectrum of risks across classes of events are also of concern, and are usually controlled in
licensing processes – it would be of concern if rare but high consequence events were found to
dominate the overall risk, particularly as these risk assessments are very sensitive to assumptions
(how rare is a high consequence event?).
Probabilistic Risk Assessment usually answers three basic questions:
1. What can go wrong with the studied technological entity or stressor, or what are the
initiators or initiating events (undesirable starting events) that lead to adverse
consequence(s)?
2. What and how severe are the potential detriments, or the adverse consequences that the
technological entity (or the ecological system in the case of a PERA) may be eventually
subjected to as a result of the occurrence of the initiator?
3. How likely to occur are these undesirable consequences, or what are their probabilities or
frequencies?
Two common methods of answering this last question are event tree analysis and fault tree
analysis – for explanations of these, see safety engineering.
31
In addition to the above methods, PRA studies require special but often very important analysis
tools like human reliability analysis (HRA) and common-cause-failure analysis (CCF). HRA deals
with methods for modeling human error while CCF deals with methods for evaluating the effect of
inter-system and intra-system dependencies which tend to cause simultaneous failures and thus
significant increase in overall risk.
32
3. Understand the strategies that organizations use to
achieve competitive advantage
Competitive advantage
Businesses are always looking for a competitive advantage, a way to stand apart from the masses
and to offer something that's just right for a specific target audience. Therein lies the secret.
Competitive advantage requires identifying a specific target audience with a clearly defined need,
developing and delivering a high-quality and appropriately priced product or service and doing it
better than anybody else.
Target Audience With Clearly Defined Need
Effective business strategy begins with focusing on the particular needs of a target audience.
Cooks who wanted a faster way to cook food welcomed the microwave. Busy people on the move
wanting a fast, affordable way to communicate with others embraced the cell phone. Businesses
that are able to identify an audience and meet their needs better than their competitors will find
themselves with a clear competitive advantage.
Delivering a High-Quality Service
Competitive advantage means just that: being better than the other available alternatives that
your target audience has and, in the process, achieving an advantage. It's not enough to be "just
as good as" the competition. Successful strategic advantage falls to those who can deliver a
product or service that is better in some way and that is more meaningful to the target audience,
says Lin Grensing-Pophal, a marketing consultant and the author of "Marketing With the End in
Mind." High-quality is defined differently by different people, she says, and encompasses all
elements of the marketing mix—product, price, place (or access) and promotion.
An Appropriate Price
Determining an appropriate price depends on the market and the competitive strategy that the
business has selected. Is a Starbucks coffee worth $4 to $5? It is if Starbucks customers are willing
to pay that much.
Starbucks caters to a different audience than McDonald's, for instance, which sells coffee for much
less. Appropriate price will be determined by the competitive position that a company hopes to
achieve relative to its competitors and the weight of its brand image.
33
Being the Best
Being the best—at whatever it is—is the key to achieving competitive advantage for a business.
Whether that means the best price, the easiest access, the best quality or the best service,
successful companies find a way to differentiate themselves from the masses.
Strategic moves to build a competitive advantage
Companies can make a number of different strategic moves to build competitive advantage. The
aim is to create a clear difference that is important to your customers, and is something your
competitors cannot match. You can create competitive advantage by developing a strategy of
leadership in factors such as cost, quality, innovation and customer experience. However,
according to PRTM Management Consulting, you should identify the one thing that you do
extraordinarily well and focus your strategy on that.
Knowledge
Your information systems strategy can build a strong competitive advantage by enabling you to
capture and share the knowledge of experts in the company. Using knowledge-capture software
or a secure forum on your website, you can ask experts to contribute best practice, advice or
information on important business processes. Sharing that knowledge can help you reduce costs
or improve performance and efficiency in areas that provide competitive advantage, such as
product development, engineering, manufacturing and customer service.
Cost
Costs provide you with an important competitive advantage. By becoming a low-cost producer,
you can offer customers prices that your competitors may not be able to match. If you can offer
low prices while maintaining quality, you can strengthen competitive advantage further. You can
make a number of strategic moves to reduce costs, including investing in efficient production
equipment, outsourcing manufacturing to a low-cost producer, or collaborating with suppliers to
improve supply-chain efficiency.
Innovation
A strategy of innovation gives you a competitive advantage by developing products that
differentiate your company and meet customer needs more effectively than competitors. Focus
your product development program on features that offer customers exceptional value or unique
34
benefits. Those innovative features will provide a strong advantage because competitors will find
it difficult to imitate them or provide substitutes that offer the same value.
Partnership
A partnership strategy can improve many aspects of competitive advantage. Working with partners
can give you access to strategically important skills, components or other resources that enable
you to innovate in your operations and products. Integrating your operations with partners in the
supply chain can also improve competitive advantage by giving you exclusive access to key
supplies and creating barriers to entry for competitors.
Customer Experience
Knowledge of customers and exceptional service are the only sustainable form of competitive
advantage, according to Forrester Research. To achieve that, you need to invest in four key areas:
customer research; quality of customer experience and customer service; sales channels that
provide high levels of customer information; and marketing material that uses customer
information to create high levels of personalization.
Integration of business functions
Can you picture everyone in your business being happy and stress free, with your operations and
business functions working together seamlessly? Integrating your business systems, processes,
and functions can make this your reality.
1. Improved Customer Service
The quicker and more efficiently you address your customers’ needs, the more likely they are to
come back and rave about your excellent customer service. With an integrated business, you can
easily address enquiries by having all the information you need on hand right when you need it.
2. Increase Sales
A properly integrated system can make it easier for customers to purchase your products or
services. Whether it’s an in-store kiosk, online store or online booking calendar, anything that
makes your current sales system operate more smoothly can have a huge impact on your overall
sales.
35
3. Provide a Better Work Environment
Many people think that increasing the technology used in a business integration project means
you need fewer workers. In my experience, it actually means that there is more time that can be
spent on non-tech activities like face-to-face customer interaction. This makes it easier for staff
to do their work and clears up time for more meaningful work.
4. Have More Time
Integrating enables you to run your operations more efficiently, saving time. What used to take
two days to do could now be done in one or less! What do you do with all that extra time? Maybe
you can take a vacation!
5. Make More Money
The trick with integrated systems is that everything needs to work together. That includes the
financial system having an efficient accounting system that ties into your existing processes will
help you track your pennies properly so you’ll know where to spend them later.
The best time to work on Business Integration is as you are building your business, but that doesn’t
mean it’s too late. If you’re business is already established, you can to find a way to integrate as
much as you can with the resources you have. Sometimes, just changing the order in which you
do things can help you better integrate your systems.
Pricing strategies
Every business must have a well-studied pricing strategy that allows it to sell its products and
make a profit. Pricing methods cannot be taken lightly and must be adapted to the position in the
market, the mindset of the consumer and the degree of competition. Companies must use effective
pricing strategies to sell their products in a competitive marketplace so they can make a profit.
Business managers need to consider a range of factors, such as prices offered by competitors,
costs for production and distribution, product image positioning in the minds of consumers, and
determining the demographics of potential buyers.
Premium Pricing
Businesses use a premium pricing strategy when they're introducing a new product that has
distinct competitive advantages over similar products. A premium-priced product is priced higher
than its competitors.
36
Premium pricing is most effective in the beginning of a product's life cycle. Small businesses that
sell goods with unique properties are better able to use premium pricing. To make premium pricing
palatable to consumers, companies try to create an image in which consumers perceive that the
products have value and are worth the higher prices. Besides creating the perception of a higher
quality product, the company needs to synchronize its marketing efforts, its product packaging
and even the decor of the store must support the image that the product is worth its premium
price.
Penetration Pricing
Marketers use penetration pricing to gain market share by offering their goods and services at
prices lower than those of the competitors. Marketers want to get their products out in the market
so that the products raise consumer awareness and induce buyers to try the products.
Although this lower price strategy may result in losses for the company -- at first -- but marketers
expect that after achieving a stronger market penetration that they will raise prices to a more
profitable level.
Economy Pricing
An economy pricing strategy sets prices at the bare minimum to make a small profit. Companies
minimize their marketing and promotional costs. The key to a profitable economy pricing program
is to sell a high volume of products and services at low prices. Large companies, such as Walmart,
are able to take advantage of this low-price strategy, but small businesses will have difficulty
selling enough products at low prices to stay in business.
Price Skimming
Price Skimming is a strategy of setting prices high by introducing new products when the market
has few competitors. This method enables businesses to maximize profits before competitors enter
the market, when prices then drop.
Psychological Pricing
Marketers use psychological pricing that encourages consumer to buy products based on emotions
rather than on common-sense logic. The best example is when a company prices its product at
$199 instead of $200. Even though the difference is small, consumers perceive $199 as being
substantially cheaper. This is known as the "left-digit effect."
37
Bundle Pricing
Businesses use bundle pricing to sell multiple products together for a lower price than if they were
purchased separately. This is an effective strategy to move unsold items that are simply taking up
space. Bundling also creates the perception in the mind of the consumer that he's getting a very
attractive value for his money.
Bundle pricing works well for companies that have a line of complimentary products. For example,
a restaurant could offer a free dessert with an entree on a certain day of the week. Older video
games that are reaching the end of their lives are often sold with a Blu-ray to sweeten the deal.
Companies need to study and develop pricing strategies that are appropriate for their goods and
services. Certain pricing methods work for introducing new products whereas other strategies are
implemented for mature products that have more competitors in the market.
38
Strategies
Specific strategies, such as identifying product strengths, adjusting pricing, or acquiring another
business, have historically been used to get a small enterprise off the ground. Understanding these
strategies, and skillfully implementing them, can help entrepreneurs achieve success. New
companies often face unique challenges. Specific strategies, such as identifying product strengths,
adjusting pricing, or acquiring another business, have historically been used to get a small
enterprise off the ground. Understanding these strategies, and skillfully implementing them, can
help entrepreneurs achieve success.
Growth Strategy
A growth strategy entails introducing new products or adding new features to existing products.
Sometimes, a small company may be forced to modify or increase its product line to keep up with
competitors. Otherwise, customers may start using the new technology of a competitive company.
For example, cell phone companies are constantly adding new features or discovering new
technology. Cell phone companies that do not keep up with consumer demand will not stay in
business very long.
A small company may also adopt a growth strategy by finding a new market for its products.
Sometimes, companies find new markets for their products by accident. For example, a small
consumer soap manufacturer may discover through marketing research that industrial workers
like its products. Hence, in addition to selling soap in retail stores, the company could package the
soap in larger containers for factory and plant workers.
Product Differentiation Strategy
Small companies will often use a product differentiation strategy when they have a competitive
advantage, such as superior quality or service. For example, a small manufacturer or air purifiers
may set themselves apart from competitors with their superior engineering design. Obviously,
companies use a product differentiation strategy to set themselves apart from key competitors.
However, a product differentiation strategy can also help a company build brand loyalty.
Price-Skimming Strategy
A price-skimming strategy involves charging high prices for a product, particularly during the
introductory phase. A small company will use a price-skimming strategy to quickly recover its
production and advertising costs. However, there must be something special about the product
for consumers to pay the exorbitant price. An example would be the introduction of a new
39
technology. A small company may be the first to introduce a new type of solar panel. Because the
company is the only one selling the product, customers that really want the solar panels may pay
the higher price. One disadvantage of a price-skimming is that it tends to attract competition
relatively quickly. Enterprising individuals may see the profits the company is reaping and produce
their own products, provided they have the technological know-how.
Acquisition Strategy
A small company with extra capital may use an acquisition strategy to gain a competitive
advantage. An acquisition strategy entails purchasing another company, or one or more of its
product lines. For example, a small grocery retailer on the east coast may purchase a comparable
grocery chain in the Midwest to expand its operations.
Competitive Business Strategies
A competitive advantage allows a company to produce or sell goods more effectively than another
business. Business owners commonly develop business strategies in order to maintain a
competitive advantage. Several types of strategies are available in the business environment.
Business owners can use standard strategies or develop their own strategy. Flexibility is an
important feature of competitive business strategies.
Cost Leadership
Cost leadership is a business strategy that allows a company to become the lowest cost production
company in an industry. Traditionally, businesses have two options for improving profits:
increasing sales or decreasing costs. Cost leadership strategies focus on acquiring raw materials
that are the highest quality at the lowest price. Business owners must also use the best labor to
transform raw materials into valuable consumer goods. Low-cost leadership usually translates into
high-quality goods at low consumer prices. The ability to undercut a competitor’s price often leads
to increases in market share.
Differentiation
Business owners use competitive business strategies to differentiate their goods or services from
others in the industry. Differentiation may be actual or perceived. Actual differentiation involves
creating products that are not currently available in the economic marketplace. Perceived
differentiation takes a little more work on the part of companies. Companies typically use
advertising messages that describe a product similar to those in the market with a few subtle
differences. This strategy encourages consumers to differentiate the product in their minds.
40
Price Strategy
Many businesses develop pricing strategies to maintain a competitive advantage. These include
penetration, economy, skimming, bundle and promotional strategies. Penetration pricing uses low
initial prices to gain market share and slowly increases the price to its normal level. Economy
pricing offers basic products that have the lowest customer price possible.
Skimming is a price strategy in which companies set high initial product prices that decrease to
match lower prices from new competitors. Bundle pricing is a strategy where companies include
several different products under one price. This allows a business to provide more products to
consumers at a slightly lower price. Promotional pricing strategies may allow businesses to offer
additional benefits to consumers, such as a buy-one-get-one-free business strategy.
Downsizing
Downsizing refers to the reduction of a company's labor force. Instead of firing workers, however,
the employer shrinks the payroll by permanently eliminating positions. This approach has gained
popularity since the 1980s for companies looking to cut costs during tough economic times, or to
improve efficiency and performance. Some employers may also try cutting employees' hours, or
instituting unpaid vacation days as less devastating alternatives. Employers who downsize must
still follow state and federal notification laws.
Why Businesses Downsize
Economic motivations are the most common reason for downsizing. With credit markets frozen by
the 2007 U.S. economic slowdown, many employers felt they had few options, according to an
analysis by University of Colorado business professor Wayne F. Cascio. Sometimes, management
also downsizes to keep pace with changing business conditions. Companies pursuing different
markets or customers also downsize departments or specialties if employees' skill sets are seen
as obsolete. They may then hire new employees to implement the new business strategy.
Federal Law
Employers who downsize must follow the Worker Adjustment and Retraining Notification Act. The
law requires companies to provide at least 60 days' written advance notice of plant closings or
mass layoffs that affect 50 or more workers, according to the U.S. Small Business Administration.
The law affects companies with 100 or more employees, although some states have passed similar
bills to cover businesses with smaller workforces. Generally speaking, the requirements don't
41
count employees who put in 20 or fewer hours per week, or haven't worked more than six months
in the past year.
Options for Employers
Employers unwilling to downsize may consider selling part or all of their companies. However,
such plans may divert energy and time from running the business, according to "Entrepreneur"
magazine. A qualified buyer may also not emerge. Cutting employees' daily or weekly hours is
another option. Businesses may also implement unpaid vacations -- commonly called forced
furloughs -- of one or two days a week, for example. Such measures naturally lower morale, but
can help an employer to control costs and keep everyone on the payroll.
Resources
Rapid Response Teams are available through the U.S. Department of Labor to help labor and
management. The teams provide customized, on-site assistance intended to ease companies and
workers through the difficulty of mass layoffs, according to the department's overview. Team
representatives meet with affected employees before the layoffs to provide career counseling and
help finding new jobs. Other services include interview skills workshops, resume preparation, and
giving information about education and job training opportunities. The teams also provide special
assistance to veterans and adults with disabilities.
Advantages and Disadvantages of Downsizing a Company
Downsizing your organization is necessary in some situations, but it is not always a bad thing for
your business. When you get involved in the downsizing process, you need to make business
decisions that are best for your company and try to leave out the personal feelings that can come
with letting employees go. You need to consider advantages and disadvantages to downsizing
before making your final decision.
Scaling Operations
One of the advantages of downsizing is that it gives you a chance to scale your business down to
a more realistic and manageable size. During periods of growth, companies tend to add personnel
and equipment that serves immediate business purposes. It is natural that a company's business
model or customer base shift during the organization's evolution. Downsizing is your chance to
bring your company size down to something that can more efficiently serve your customers and
remain profitable.
42
Re-evaluation
Downsizing forces an organization to re-evaluate its business processes and rewrite its business
plan to more accurately reflect the current business status. A business should constantly update
its business plan to reflect changes in the marketplace and internal shifts that affect business
productivity. The decision to downsize is part of the more important process of re-evaluating the
business plan and places the company in a better competitive position for the future.
Decision Making
When you downsize your company and release employees, your company misses out on the
collective experience of the staff members that are let go. The company decision-making is
affected, because the opinions and input of those departing employees will be missed. If you are
forced to let employees go that have several years with your company, then you lose people with
intimate experience of past decisions and how those decisions affected company productivity and
profitability.
Reputation
Outsourcing business responsibilities is one of the reasons why companies downsize. If you are
downsizing due to outsourcing, then disgruntled former employees can be a source of public
relations issues for your company. They can damage your company's public reputation and that
can lead to a drop in revenue. Repeat customers and potential new clients may not appreciate
your decision and could pull their business.
Market position
Positioning helps lay out where a business (and its product) fits into the marketplace, so that the
marketing team can effectively market it. Positioning is a marketing concept that outlines what a
business should do to market its product or service to its customers. In positioning, the marketing
department creates an image for the product based on its intended audience. This is created
through the use of promotion, price, place and product. The more intense a positioning strategy,
typically the more effective the marketing strategy is for a company. A good positioning strategy
elevates the marketing efforts and helps a buyer move from knowledge of a product or service to
its purchase.
43
Target Market Analysis
The best start for any positioning analysis is gaining a thorough knowledge of a product or service's
target market. This is the group of people or businesses that will best benefit from the use of the
product or service. With a good idea of the wants, needs and interests of a product or service's
target market, a good marketing team can help develop a positioning statement to help reach as
much of the target market as possible.
Positioning in Advertisements
Advertisements are usually the first places businesses position themselves. A cosmetics marketing
department, for example, must determine who they are targeting and what consumer need is
being met. If the intended target is African American teenagers, what type of need should the
cosmetics fill? If the cosmetics line is trying to help teenage girls overcome acne issues, the person
in the ad might be one of a younger African American physician who teaches girls how to battle
acne with the use of these cosmetics. To note the importance of positioning, this same type of
advertisement might not work if the intended audience of the cosmetics line was older Caucasian
women trying to look younger.
Positioning in Sales Locations
Reaching the customer is not simply a matter of advertising, it is also a matter of choosing the
right channels for distribution. If a majority of your target market lives in an urban area with only
public transportation available to them, having your product in rural areas where a private
automobile is needed for transport would not equal sales success. Place or position your product
or service as close to the target market as possible. Create similar advertisements in store as the
ones seen out of store to create an overall identity for your brand.
Positioning through Price
It should be noted that there is a large amount of research on the psychology of pricing in
marketing. Simply put, the price of an item tells the buyer more about the item than most realize.
Many associate a higher price with higher quality and the opposite with a lower price. Additionally,
if a product is positioned as a good alternative to high-priced brands, the marketing department
must price it in the middle of the market to avoid a comparison to the cheapest end of the
spectrum.
44
4. Understand the environmental factors that affect
strategic business management and planning
Environmental factors
Corporate expansion means not only getting more office space, but also facilities to manufacture
and store supplies and products. Choosing a facility location requires significant financial
investment, and therefore prudent planning, to ensure the location is the most cost-effective and
functional of all your options. Utilize a broad financial view of each proposed site, taking into
account not only its purchase or lease cost but the money put into it over the long term.
Layout
The physical layout of the facility location will determine whether future expansion can include
adding more facility buildings and enlarging manufacturing space within the site. Whether
buildings and manufacturing lines must be created by scratch or they are already exist on-site
with minimal renovations is also a consideration.
Cost
The cost of relocating facilities to the site is a major factor in determining the acceptability of a
location. Cost can involve tailoring existing buildings to fit your operations or building an operation
from scratch. Land may be cheap, but to make it workable might be expensive.
Logistics
The site must have adequate transportation routes to get goods to and from the site. The facility
itself must come equipped with adequate electrical and plumbing to run an effective operation; if
they don't yet exist they must be cheap enough to install at the site.
Labor
A facility requires labor to run. Management staff might relocate from other areas, but on the
ground workers are sourced locally. A facility close enough to a municipality with a healthy supply
of labor to operate it is a must.
45
Political Stability
Companies that locate facilities in international locations might benefit from a cost perspective;
however, an unstable local government that puts smooth operations at risk are a deterrent to
choosing to locate there. Some international locales, however, benefit from a free trade zone with
the U.S., saving companies duties on the goods they import back to the U.S.
Regulations
Stringent local environmental regulations that limit the nature of business operations can deter a
company from choosing a particular location. In addition, government regulations and taxes of
various kinds can prove costly down the line. On the flip side, government tax incentives that
encourage corporate development can prove a benefit to certain locales.
Community
Facility locations are not temporary; the choice you make will stick with your company for the long
haul. It's therefore key that your company fits with the community it's associated with. Although
the municipality might appreciate your company's facility because it creates jobs, some might
resent your presence because of aesthetics or environmental factors. Maintaining a hassle-free
relationship with the locals helps ensure your licenses and permits are easier to obtain and
maintain over the life of the site.
46
Why Is the Location of a Business Important?
"Location, location, location" is a cliché, but it's true. Picking the right location is a big step towards
ensuring your business has customers. Your choice of business location affects your income, your
expenses, and sometimes whether you're operating legally. Even in an age where people can buy
and sell through the internet and project teams can collaborate from various states and countries,
location plays a significant role in your company's success or failure.
The Right Community
If you work out of your home, you don't need to choose the town or neighborhood for a business.
If you're opening an office or a store, however, then location matters. Essential questions to ask
include the following:
Is the population large enough to support your business?
Is the economy healthy?
Do the demographics work for you? If your target market is young couples with kids, a
retirement community won't be a good fit.
Does your style match those in the community? Do your values match? If the neighborhood
style is funky and casual, opening an elegant store may be a mismatch.
Can you find the workers you need in the local area?
Even if you know the community, you may need to do some market research to confirm that it's
the right location for you.
Zoning Codes
Before you select a specific site, first determine if your business can legally open at that site. In
most cities, zoning codes determine what property owners can do on a given patch of land. Some
zoning codes allow retail, some allow industrial uses and some allow residential use only. Local
government may have rules for everything, from the size of your parking lot to the size of your
business sign.
If you run a home business, zoning is still a factor. Some cities or neighborhoods ban home
businesses, particularly if you have customers driving to your house. Homeowner associations
have rules and restrictions on home businesses, too. Don't give in to the impulse to fly under the
radar. If you get caught, you may have to pay fines or even shutter your business.
47
Convenience
Customers will happily make long trips for must-have purchases. When you're just starting out,
however, it's better if the effort of doing business with you is as easy as possible. If you're running
a brick-and-mortar retail store, choosing a street where customers already shop will make it easy
for them to spend money with you. You also want a location that feels safe, particularly if you're
open late in the evening.
Expenses
Now the bad news. Typically, locations guaranteed to bring in a stream of customers are the
priciest locations for setting up a shop. Less-ideal locations will have cheaper rent or a lower price
for the land. If you're off the beaten path, you may need to compensate for the low rent by
spending more for advertising. If you're in a mall, you benefit from the mall's advertising budget.
Definitely shoot for the best location you can afford. A bad location may save you money, but it
will cost you business.
Cost of production
Production cost refers to the cost incurred by a business when manufacturing a good or providing
a service. Production costs include a variety of expenses including, but not limited to, labor, raw
materials, consumable manufacturing supplies and general overhead. Additionally, any taxes
levied by the government or royalties owed by natural resource extracting companies are also
considered production costs.
BREAKING DOWN 'Production Cost'
Also referred to as the cost of production, production costs include expenditures relating to the
manufacturing or creation of goods or services. For a cost to qualify as a production cost it must
be directly tied to the generation of revenue for the company. Manufacturers experience product
costs relating to both the materials required to create an item as well as the labor need to create
it. Service industries experience production costs in regards to the labor required to provide the
service as well as any materials costs involved in providing the aforementioned service.
In production, there are direct costs and indirect costs. For example, direct costs for
manufacturing an automobile are materials such as the plastic and metal materials used as well
as the labor required to produce the finished product. Indirect costs include overhead such as rent,
administrative salaries or utility expenses.
48
Deriving Unit Costs for Product Pricing
To figure out the cost of production per unit, the cost of production is divided by the number of
units produced. Once the cost per unit is determined, the information can be used to help develop
an appropriate sales price for the completed item. In order to break even, the sales price must
cover the cost per unit. Amounts above the cost per unit are often seen as profit while amounts
below the cost per unit result in losses.
If the cost of producing a product outweighs the price that is paid for it, this may lead producers
to consider temporarily ceasing operations. For example, in January 2015, the selling price of a
barrel of oil fell to $40 a barrel. With product costs varying from $20 to $50 a barrel, a cash
negative situation occurs for those with production costs on the higher end. Those producers may
choose to cease production efforts until sale prices return to profitable levels which lowers the
amount of supply available within the market and may encourage oil prices to rise based on the
shifting supply and demand models.
Production Costs and Asset Recording
Once a product is complete, it can be recorded as a company asset until the product is sold. This
allows the value of the product to be accounted for within financial statements and other
accounting documents, and provides a way to keep shareholders informed and reporting
requirements to be met.
Ethical concerns
In the complex global business environment of the 21st century, companies of every size face a
multitude of ethical issues. Businesses have the responsibility to develop codes of conduct and
ethics that every member of the organization must abide by and put into action. Fundamental
ethical issues include concepts such and integrity and trust, but more complex issues include
accommodating diversity, decision-making, compliance and governance.
Fundamental Issues
The most fundamental or essential ethical issues that businesses must face are integrity and trust.
A basic understanding of integrity includes the idea of conducting your business affairs with
honesty and a commitment to treating every customer fairly. When customers perceive that a
company is exhibiting an unwavering commitment to ethical business practices, a high level of
49
trust can develop between the business and the people it seeks to serve. A relationship of trust
between you and your customers may be a key determinate to your company's success.
Diversity Issues
According to the HSBC Group, "the world is a rich and diverse place full of interesting cultures and
people, who should be treated with respect and from whom there is a great deal to learn." An
ethical response to diversity begins with recruiting a diverse workforce, enforces equal opportunity
in all training programs and is fulfilled when every employee is able to enjoy a respectful workplace
environment that values their contributions. Maximizing the value of each employees' contribution
is a key element in your business's success.
Decision-Making Issues
According to Santa Clara University, the following framework for ethical decision-making is a useful
method for exploring ethical dilemmas and identifying ethical courses of action: "recognizes an
ethical issue, gets the facts, evaluates alternative actions, makes a decision and tests it and
reflects on the outcome."
Ethical decision-making processes should center on protecting employee and customer rights,
making sure all business operations are fair and just, protecting the common good and making
sure individual values and beliefs of workers are protected.
Compliance and Governance Issues
Businesses are expected to fully comply with environmental laws, federal and state safety
regulations, fiscal and monetary reporting statutes and all applicable civil rights laws. The
Aluminum Company of America's approach to compliance issues states, "no one may ask any
employee to break the law, or go against company values, policies and procedures."
ALCOA's commitment to compliance is underpinned by the company's approach to corporate
governance; "we expect all directors, officers and other Alcoans to conduct business in compliance
with our Business Conduct Policies."
50
Stakeholders
The word “stakeholder” means any person with an interest in the business -- someone who can
contribute to the company’s growth and success or who benefits from its success. The various
stakeholders in a business have differing roles and their level of involvement in the enterprise
varies from full-time to barely involved at all. The company’s CEO seeks to utilize the skills,
experience and knowledge of each stakeholder group to further the organization’s long-term goals.
Employees
Top management may set the overall strategic direction for the company, but the employees are
responsible for carrying out the tasks specified in the company’s strategic plan in an efficient
manner. Employees are the closest to the action. They interact with customers on a daily basis.
In a manufacturing environment, they work directly on the company’s products. The company’s
success depends in large measure on the skill and dedication of its employees. Without the
employees performing their roles proficiently, the company will not reach its revenue and profit
potential.
Stockholders
Stockholders’ initial role is to provide the capital a company needs to grow and expand, or in the
case of a startup venture, the capital it needs to launch its products or services into the
marketplace. In private companies, stockholders may take an active role in setting the strategic
direction for the venture. They sometimes provide guidance or advice to the company’s
management. In public companies, stockholders can attend an annual meeting and ask questions
of the company’s top management, including the CEO, about the decisions they have made and
the direction the company is going.
Customers
The reason for a company’s existence is to provide products or services that meet the needs of its
target customers and benefit them in a meaningful way. The role of customers is critical to the
company’s survival and success.
Through the purchase decisions they make each day, they select which companies will prosper
and which will fail. They also provide valuable feedback to the company about its products and
customer service level. This feedback enables the company to improve what it offers and to come
up with entirely new solutions to customer needs based on what its customers asked for. For many
51
businesses, customers also play a vital role in the company’s marketing efforts by recommending
the company’s products or services to other potential customers.
Vendors
A company’s ability to fill its customer orders on time -- and bring the highest quality goods to the
marketplace -- depends in part on the role its vendors or suppliers play. The company relies upon
raw materials or components being available when they are needed and at reasonable prices. If
the supply of one key item is interrupted, it can cause a disruption in the company’s entire
manufacturing schedule. Vendors also play a role of introducing new applications or solutions to
the company so it can become more efficient, more productive and lower its costs -- and increase
its margins and profits.
The Community
The community provides the skilled workforce that a company depends upon to maintain its
competitive edge. Members of the community, including the news media, often play a watchdog
role, ensuring that the company is a good citizen with fair business practices, concern for the
environment, and a willingness to contribute to charitable and social causes.
52
Examples of a company's stakeholder
Stakeholders: Stakeholder's concerns:
Government taxation, VAT, legislation, employment, truthful reporting, legalities,
externalities...
Employees rates of pay, job security, compensation, respect, truthful communication,
appreciation, acknowledgement, recognition.
Customers value, quality, customer care, ethical products.
Suppliers providers of products and services used in the end product for the customer,
equitable business opportunities.
Creditors credit score, new contracts, liquidity.
Community jobs, involvement, environmental protection, shares, truthful communication.
Trade unions quality, worker protection, jobs.
Owner(s) profitability, longevity, market share, market standing, succession planning,
raising capital, growth, social goals.
Investors return on investment, income.
Types of stakeholders
Any action taken by any organization or any group might affect those people who are linked with
them in the private sector. For examples these are parents, children, customers, owners,
employees, associates, partners, contractors, and suppliers, people that are related or located
nearby.
Primary Stakeholders – usually internal stakeholders, are those that engage in economic
transactions with the business (for example stockholders, customers, suppliers, creditors, and
employees).
53
Secondary Stakeholders – usually external stakeholders, are those who – although they do not
engage in direct economic exchange with the business – are affected by or can affect its actions
(for example the general public, communities, activist groups, business support groups, and the
media).
Excluded Stakeholders – those such as children or the disinterested public, originally as they
had no economic impact on business. Now as the concept takes an anthropocentric perspective,
while some groups like the general public may be recognized as stakeholders others remain
excluded. Such a perspective does not give plants, animals or even geology a voice as
stakeholders, but only an instrumental value in relation to human groups or individuals.
The definition of corporate responsibilities through a classification of stakeholders to consider has
been criticized as creating a false dichotomy between the "shareholder model" and the
"stakeholders model" or a false analogy of the obligations towards shareholders and other
interested parties.