FUNCTIONAL APPROACH TO INTERNAL ANALYSIS INTRODUCTION The purpose of the internal analysis is to evaluate how the company is doing, so that its efforts can be directed in the most effective and efficient way. It s a Decision making approach in which a problem is broken down into its component functions (accounting, marketing, manufacturing, etc. ). These functions are further divided into sub-functions and sub-sub functions … until the function level suitable for solving the problem is reached.
Every organization of a given type must perform certain jobs in order do its work. For example, key functions of a manufacturing company include production, purchasing, marketing, accounting, and personnel. The functions of a hospital include surgery, psychiatry, nursing, housekeeping, and billing. Using such functions as the basis for structuring the organization may, in some instances, have the advantage of efficiency. Grouping jobs that require the same knowledge, skills, and resources allows them to be done efficiently and promotes the development of greater expertise.
Functional analysis is a tool used to express the needs of a client/user in terms of functions and performances expected, instead of focusing on a solution. In other words, the problem is presented without thinking about the solution. To accomplish this, the buyer must identify, sort, characterize and prioritize the needs of a client (internal customer). Functional analysis is the basic tool for Value Management. Value is the ratio between the level of client satisfaction and the relative cost of a product or service.
Value Management is a method to increase value to clients. Functional analysis is a support to better identify clients needs in order to increase their satisfaction at the lowest cost. The Functional Specification of Requirements is the end product of the Functional Analysis. It is the document that formalizes the client’s needs. It is a technique used to identify the labour competencies inherent in a productive function. Such function may be defined at the level of an occupational sector, an enterprise, a group of enterprises or a whole sector of production or services.
Functional analysis may be developed with different initial levels: an occupational sector (hotel); mainstream occupations at various sectors (occupational safety and health); or an occupation (PC repairman). It is thus evident the flexibility of functional analysis. Although it was designed as a wide-scale analysis tool, it may also be useful to analyse occupations in certain subsectors or even at specific organisations. (1) Functional analysis is not an exact method whatsoever.
It is a working approach to the required competencies by means of a deductive strategy. It begins by establishing the main purpose of the productive function or service under study and then questions are asked to find out what functions need to be performed in order for the previous function to be achieved. Ideally, this is carried out on a group of workers who are familiar with the function object of the analysis. Its worth as a tool comes directly from its representative quality. Certain rules are followed during its preparation in order to keep uniform criteria.
The main purpose, key purpose or key function of the enterprise is usually described by following this structure: [pic] DEVELOPMENT OF FUNCTIONAL APPROACH TO MANAGEMENT Henri Fayol was the first person to identify elements or functions of management in his classic 1916 book Administration Industrielle et Generale. Fayol was the managing director of a large French coal-mining firm and based his book largely on his experiences as a practitioner of management. Fayol defined five functions, or elements of management: planning, organizing, commanding, coordinating, and controlling.
Fayol argued that these functions were universal, in the sense that all managers performed them in the course of their jobs, whether the managers worked in business, military, government, religious, or philanthropic undertakings. Fayol defined planning in terms of forecasting future conditions, setting objectives, and developing means to attain objectives. Fayol recognized that effective planning must also take into account unexpected contingencies that might arise and did not advocate rigid and inflexible plans. Fayol defined rganizing as making provision for the structuring of activities and relationships within the firm and also the recruiting, evaluation, and training of personnel. According to Fayol, commanding as a managerial function concerned the personal supervision of subordinates and involved inspiring them to put forth unified effort to achieve objectives. Fayol emphasized the importance of managers understanding the people who worked for them, setting a good example, treating subordinates in a manner consistent with firm policy, delegating, and communicating through meetings and conferences.
Fayol saw the function of coordination as harmonizing all of the various activities of the firm. Most later experts did not retain Fayol’s coordination function as a separate function of management but regarded it as a necessary component of all the other management functions. Fayol defined the control function in terms of ensuring that everything occurs within the parameters of the plan and accompanying principles. The purpose of control was to identify deviations from objectives and plans and to take corrective action.
Fayol’s work was not widely known outside Europe until 1949, when a translation of his work appeared in the United States. Nevertheless, his discussion of the practice of management as a process consisting of specific functions had a tremendous influence on early management texts that appeared in the 1950s. Management pioneers such as George Terry, Harold Koontz, Cyril O’Donnell, and Ralph Davis all published management texts in the 1950s that defined management as a process consisting of a set of interdependent functions.
Collectively, these and several other management experts became identified with what came to be known as the process school of management. According to the process school, management is a distinct intellectual activity consisting of several functions. The process theorists believe that all managers, regardless of their industry, organization, or level of management, engage in the functions of management. The process school of management became a dominant paradigm for studying management and the functions of management became the most common way of describing the nature of managerial work.
Factors used to determine Functional approach 1. Industry and market Introduction of function within the industry brings new function or department in the organization for example, introduction of MPesa services in Safaricom leads to another department of micro finance unit to facilitate banking functions. 2. Product /service being offered A new product in an organization will involve research and development as a function within an organization as opposed to an existing product. 3. The size of the company Analysis is generally structured around functional areas e. . restaurant, organization of internal analysis would be as dining room, kitchen, personnel, management, marketing ,finance/accounting, research/development. 4. Strategic Plan of the organization These are the skills and assets required to be successful in any industry. The most critical of these are known as strategic internal factors, strategic competences or critical success factors which would include profitability, customer satisfaction, employee satisfaction and service gaps. WHEN TO PERFORM FUNCTIONAL ANALYSIS The functional approach is used when: 1.
The company is searching for substitutes (lower cost and/or easier to source) for an existing solution 2. The company is searching for innovative solutions to a given need (exposing the “problem” to the suppliers and asking them to find solutions) 3. The company is searching improvement in the existing solution (better satisfaction of clients and/or cost reduction) 4. The company needs to use better the supplier’s know-how ADVANTAGES OF FUNCTIONALIZED ORGANISATION 1. Use of specialist makes the organization a more professionally managed system. . Line executive relieved from specialized decisions. 3. Decision-making is faster, as functional role is vested in the functional head of department and not in the immediate superior. 4. Better consistence in all activities due to specialized activity of functional groups. 5. More R & D, less wastages, less accident, less breakdown, better TQM efforts, more effective quality circles, etc. , due to functional staff. 6. Economy of scale, due to dedicated functional groups. DISADVANTAGES OF FUNCTIONALIZED ORGANISATION 1.
People with the same skills and knowledge may develop a narrow departmental focus and have difficulty appreciating any other view of what is important to the organization; in this case, organizational goals may be sacrificed in favor of departmental goals 2. In addition, coordination of work across functional boundaries can become a difficult management challenge, especially as the organization grows in size and spreads to multiple geographical locations PROCEDURES FOLLOWED TO PERFORM FUNCTIONAL ANALYSIS According to INTECAP of Guatemala, the stages of functional analysis are: 1.
Forming the Standardization Committee; The process of disaggregation (breakdown) of functions is conducted by following the cause-effect logic. While conducting the breakdown, it should be verified what is necessary to be achieved in order to obtain the result described in the function that is being disaggregated. In this way, the disaggregation of a function at the following level represents what needs to be achieved in order for that function to be carried out. The key question of the breakdown is: “what needs to be done to achieve this? ” 2. Training the Committee;
The change conductor trains the standardization committee . The main function of this is to gauge and enable them to understand each departments functions, it effects and achievements and also on how train other staff in those departments so that it can be internalized by each member of the organisation 3. Applying basic principles and procedures of disaggregation to functional analysis; The functional map is not a representation of work processes. It does not seek to describe the process graphically, but rather the necessary productive functions to fulfil the key purpose.
While making the map, it should be avoided to include descriptions of operations or tasks. It is the case of the function: “working under safety conditions”, which should not be described in terms of “wearing a helmet” or any other safety element. The relationship between functions and the key purpose should be particularly considered throughout the drawing up of the functional map. Therefore, it is advisable to check periodically that this principle of consistency is kept in the analysis. This revision should give account of the functions that may appear repeated at the different branches of the tree.
The logic followed for drawing up the functional map does not accept such repetitions. If that was the case, it should be revised and re-made. 4. Verifying the functional map; This is a follow-up procedure to know wether they are fully operational in those departments. Any challenges are recorded and taken back to the standardization committee and the management for consideration and discussion. It is meant to test the operations of each department and how they are related ensuring that there is no conflicts between them 5. Validating the functional map;
This is the commissioning and implementation of the functional departments’ . It is the authorization stage where the functional departments are documented and approved by the management ILLUSTRATION OF A MODEL COMPANY Below is an example of an organization with different functional units, Background: ICN Toshiba provides tailored IT Solutions together with IT Consultancy, Training, Software development and also with the supply and integration of hardware, software, networking, maintenance of computer systems, managed services and Facility Management Services.
ICN Toshiba offers a range of expertise in the areas of Information Technology: High End RISC Servers, Softwares Development Services, Systems Integration, ERP Solutions, Relational Data Base Expertise, Electronic Commerce and Consulting. ICN Toshiba also offers a range of consulting and IT skills, helping businesses re-engineer and reinvent their business process and compete successfully in an ever-changing market place. ICN Toshiba has the following Functional units, 1. Finance Department, STRENGH |WEAKNESS |STRATEGIC IMPLICATION | |Existence of financial policy manual | |Helps to direct the procedures and rules to be| | | |followed | |Existence of Qualified Personnel. |Helps in the implementation of finance | | | |function & follow standards | |Existence of an Integrated computerized | |Helps in faster processing of financial data | |system | |and reports. | |Lack of Internal control Department |Affects the ability to ensure that all | | | |co. policy are implemented and documents are | | | |accurately recorded. | |Lack of independence/interference by senior management |Affects the quality of reporting and following| | | |procedures | | |Lack of budget |Lack of targets and performance appraisal of | | | |the organisation | 2. Human resources Department, STRENGH |WEAKNESS |STRATEGIC IMPLICATION | |Existence of human recourses manual | |Helps to guide recruitment | | | |,qualification,dismissal of staff etc | | |Lack of qualified staff in the department |Affects the quality of staff within the | | | |organisation | |Capacity building and coninous training | |It affects cohesiveness and capacity of staff | | |Interference by management during recruitment |Bring in unqualified staff within the | | | |organization affecting perfomance | 3. Procurement Department |STRENGH |WEAKNESS STRATEGIC IMPLICATION | |Existence of procurement policy | |Affects the timing,price and quality of goods& | | | |services | |Existence of E-Procurement system | |Ensures faster interactions with suppliers and up| | | |to date data | | |Lack of procurement committee |Leads to instances of single sourcing | | |Lack of independence of the department |Leads to improper procurement | 4. Sales and Marketing |STRENGH |WEAKNESS |STRATEGIC IMPLICATION | |Existence of qualified personnel | |Ensures high sales performance | | |Limited resources to facilitate staff during |Leads to high turnover of staff to rival | | |field visit e. transport |companies | | |Lack of adequate incentives to support staff eg |Leads to low morale and low sales | | |sales commissions | | |Locations in malls & supermarkets | |Ensures accessibility by existing and new | | | |customers | References Carroll, Stephen J. , and Dennis J. Gillen. “Are the Classical Management Functions Useful in Describing Managerial Work? ” Academy of Management Review . Kenyatta National Hospital, Strategic Plan 2008-2012 Fayol, Henri. General and Industrial Administration. London: Sir Issac Pitman & Sons, Ltd. , 1949. Koontz, Harold, and Cyril O’Donnell. Principles of Management: An Analysis of Managerial Functions. New York: McGraw-Hill Book Co. , 2004. Lamond, David. A Matter of Style: Reconciling Henri and Henry. ” Management Decision 2001 Robbins, Stephen P. and Mary Coulter. Management. Upper Saddle River, NJ: Prentice Hall, 1999. INDUSTRIAL ANALYSIS DEFINITION: Industrial analysis is a market assessment tool designed to provide a business with an idea of the complexity of a particular industry. It involves reviewing the economic, political and market factors that influence the way the industry develops . Major factors can include power wielded by suppliers and buyers, the condition of competitors and likelihood of new market entrants. Industry analysis therefore, tries to identify the forces which affect the level of competition in an industry.
Research has proved that industry analysis is very effective at the strategic business unit level because if it is done at a generalized level it reduces its value. Business planning could also be described as part of an on-going continuous activity concerning the direction of the whole organization. It contains the mission, objectives, strategies, tactics, and policies that will serve as a guide to the organization in adapting to the environment for a specified period of time. Strategy is the determination of the basic long-term goals and objectives of an enterprise, the courses of action to be taken and the allocation of resources that would be needed for carrying out these goals. Thus, strategy is not an end in itself but rather a means to an end.
It is this which makes it vital ‘must have’ ingredient in any business. It is normally included in the marketing and business plans of organizations. Strategy is, therefore, developing and shaping organization’s goals and objectives providing the needed response to the environment (for competitive advantage) and providing good corporate governance. As had already been pointed out strategy and business planning are somewhat linked. ‘Strategy’ is normally part of the business and marketing planning processes. Industry and competitive analysis form part of the first stages of business planning and strategy. However, there is some distinction between the two.
Whereas industry analysis concerns itself with the issues pertaining in the industry which affects the industry, competitive analysis looks at the marketing and financial indicators, mission statements, Research and Developments and product developments to ascertain where competitors are focusing their priorities and resources. To make easier analysis, Porter developed a model, a matrix, which compares the five forces against three levels of intensity, low, medium and high where it portrays one of intense competition from rivals and a high need to maintain its customer base against them. In business planning and strategy, industry analysis helps in the positioning of the business and in the right environment (i. e. getting adapted to the environment and the formulation of strategy.
Competitor analysis on the other hand influences business planning and strategy by providing the marketing, financial and other key information about competitors which will help in the business planning and formulating a strategy that will give the organization the needed competitive advantage. PORTERS MODEL INTRODUCTION Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market.
These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these. Porter five forces are widely used to assess the structure of any industry, and they include: 1. Bargaining power of suppliers 2. Bargaining power of buyers 3. Threat of new entrants 4. Threat of substitutes 5. Rivalry among competitors Together the strength of the five forces determines the profit potential in an industry by influencing the prices, costs & required investments Stronger forces are associated with more challenging business environment Analysis to identify & examine key factors for competitive success Porter’s five forces model – value
By examining these factors, they help an industry in finding out; • Key forces that influence the competitive environment • Underlying forces that drive the competitive forces • Relative position of major competitors • Steps can be taken to influence the competitive forces 1. POWER OF SUPPLIERS The power of buyers describes the effect that your customers have on the profitability of your business. The transaction between the seller and the buyer creates value for both parties. But if buyers (who may be distributors, consumers, or other manufacturers) have more economic power, your ability to capture a high proportion of the value created will decrease, and you will earn lower profits.
Here, an industry assesses how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers’ help, the more powerful your suppliers are. The term ‘suppliers’ comprises all sources for inputs that are needed in order to provide goods or services. Supplier bargaining power is likely to be high when: • The market is dominated by a few large suppliers rather than a fragmented source of supply, • There are no substitutes for the particular input. The supplier’s customers are fragmented, so their bargaining power is low, • The switching costs from one supplier to another are high, • There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when • The buying industry has a higher profitability than the supplying industry, • Forward integration provides economies of scale for the supplier, The buying industry hinders the supplying industry in their development (e. g. reluctance to accept new releases of products), • The buying industry has low barriers to entry. In such situations, the buying industry often faces a high pressure on margins from their suppliers.
The relationship to powerful suppliers can potentially reduce strategic options for the organization. Therefore, ? Any business require inputs – labor, parts, raw materials, services ? Input costs can have significant effect on a company’s profitability ? The amount of strength of suppliers can determine how they can influence the terms & conditions of transactions in their favor ? If it is weak then you may negotiate a favorable business deal ? Suppliers can affect overall profitability & also competitiveness of individual firms by altering the input prices, availability ? Do a self assessment Factors affecting bargaining power of suppliers It is favorable to the suppliers when; Inputs required are only available from a small number of suppliers – For instance, if you are making computers and need microprocessors, you will have little or no bargaining power with Intel, the world’s dominant supplier,local example would be KPLC and KENGEN being the only suppliers of power in Kenya • Inputs are unique making it costly to switch suppliers. If you use a certain enzyme in a food manufacturing process, changing to another supplier may require you to change your entire manufacturing process. This may be very costly to you, thus you will have less bargaining power with your supplier e. g the communication industry in Kenya dominated by few players. • Input purchases don’t represent a significant portion of supplier’s business, If the supplier does not depend on your business, you will have less power to negotiate. Of course the opposite is true as well.
Wal-Mart has significant negotiating power over its suppliers because it is such a large percentage of suppliers’ business. examples are the Safaricom subscribers in the country where an individual quitting may not really affect the suppliers business/profits. • Suppliers can sell directly to your customers bypassing the need for your business. For example, a manufacturer could open its own retail outlet and compete against you. .An example includes Ketepa tea selling directly to the supermarkets. • Difficult to switch to another supplier owing to the investment already done. For example, if you recently invested in a unique inventory and information management system to work effectively with your supplier, it would be expensive for you to switch suppliers.
This is evident where the supplier has offered training to the client or has financed the major part of the clients business, examples could include Farmers choice financing pig rearing to its clients. • You do not have full understanding of your supplier’s market. You are less able to negotiate if you have little information about market demand, prices, and supplier’s costs. As an example, an investor who requires a valuer to invest in a property and has no information on the same may be an advantage to the supplier Managing/Reducing bargaining power of suppliers • Partnership with supplier for mutual benefits if they can reduce inventory cost by providing J-I-T deliveries.
The use of information on customer needs & preferences to enhance value and adoption of new technologies, example being the integration of Safaricom and Equity bank on M-pesa and Pesa points as a new technology for a mutual benefit and advantage to their customers. • Form a buying group to increase your power. Here an example could be dairy farmers through co-operative societies coming together to increase their bargaining power over KCC,Safaricom dealers distribution joining forces to increase their power on Safaricom and also the matatu industry forming associations to increase their bargaining power. • Produce your own inputs. Here,an examples include Brookside rearing their own cows for milk production and Supermarkets baking their own bread and cakes for sale within the supermarket and its chains. • Entering into long term agreements Develop substitutes or alternative sources of supply, an example could be companies acquiring generators as a form of an alternative source of power generation. • Supply chain management • Supply chain training • Increase dependency • Build knowledge of supplier costs and methods • Take over a supplier 2. POWER OF THE BUYER /CUSTOMERS The power of buyers describes the effect that your customers have on the profitability of your business. The transaction between the seller and the buyer creates value for both parties. But if buyers (who may be distributors, consumers, or other manufacturers) have more economic power, your ability to capture a high proportion of the value created will decrease, and you will earn lower profits.
Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you. It determines how much customers can impose pressure on margins and volumes. Customers bargaining power is likely to be high when They buy large volumes, there is a concentration of buyers, The supplying industry comprises a large number of small operators The supplying industry operates with high fixed costs,
The product is undifferentiated and can be replaces by substitutes, Switching to an alternative product is relatively simple and is not related to high costs, Customers have low margins and are price sensitive, Customers could produce the product themselves, The product is not of strategically importance for the customer, The customer knows about the production costs of the product There is the possibility for the customer integrating backwards. • The effect customers have on your business’ profitability- for example KPLC having amajor client giving upto 80% of its total revenue per month,its withdrawal could mean major loses to the supplier. Value creation in transacting for either distributors, consumers, other manufacturers- an example being Bonga points on safaricom subscribers where you earn points on value of airtime loaded and also M-pesa agents earning commissions on total transactions. • If they have more economic power-the less the value created for you Power of the buyers Have most power when, • They are large and few large buyers ’-here, you may have little negotiation power if you and several competing companies are trying to sell similar products to one large buyer. • Volume purchased is large • Many small customers acting as a group e. g. safaricom dealers • Large number of suppliers whose inputs are undifferentiated eg business stalls selling the same line of products. • Switching cost is low-example is Zain subscribers could easily switch to twin-sim cards just because the switching costs are considerably low. The products represent a relatively large expense for customers-customers may not price shop for oil, but they will price shop if purchasing a new vehicle. • Customers have access, can evaluate market information, you have less rooms for negotiation if buyers know market demand, prices and your costs. • Customers can make your product themselves. • Product not unique-If your hand is homogenous or similar to all of the others, buyer will base their decision mainly on price. Managing /Reducing power of the buyers • Increase customers loyalty to your business • Increase value of a product, make it unique • Emphasis on service factors • Target customers who have less knowledge of the market • Have many customers Purchase a competitor providing the same products as you or partner • Partnering • Supply chain management • Increase loyalty • Increase incentives and value added • Move purchase decision away from price • Cut put powerful intermediaries (go directly to customer) 3. THREAT OF NEW ENTRANTS The threat of new entrants is the possibility that new firms will enter the industry. New entrants bring a desire to gain market share and often have significant resources. Their presence may force prices down and put pressure on profits. Analyzing the threat of new entrants involves examining the barriers to entry and the expected reactions of existing firms to a new competitor.
Barriers to entry are the costs and/or legal requirements needed to enter a market. These barriers protect the companies already in business by being a hurdle to those trying to enter the market Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it The ompetition in an industry will be the higher, the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e. g. market shares, prices, customer loyalty) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry. The threat of new entries will depend on the extent to which there are barriers to entry. These are typically Economies of scale (minimum size requirements for profitable operations), High initial investments and fixed costs, Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets, Brand loyalty of customers
Protected intellectual property like patents, licenses etc, Scarcity of important resources, e. g. qualified expert staff Access to raw materials is controlled by existing players, Distribution channels are controlled by existing players, Existing players have close customer relations, e. g. from long-term service contracts, High switching costs for customers Legislation and government action Possibility that new firms will enter the market,may -Interfere with market share -May have significant resources -Their presence may force prices down eg entrance of Keroche and castle larger which influenced the prices of Tusker. Threat of new entrants
These get reduced if there are high entry barriers e. g. • High economies of scale is apparent –example includes Sacco share capital for start-ups,insurance companies and safaricom broad band. • High capital cost requirement • Loyalty to existing brands • Access to distribution channel,this locks out new entrants • High extent of differentiation-here,no one is able to beat your products eg Omoo,Blue band,Ketepa and Coca-cola products which are already well established in the market. • Access to necessary inputs • Anticipated retaliation by existing operators-This is evident by the matatu industry where much retaliation is experienced when anew operator wants to join the industry.
Factors affecting threat of new entrants Threat greatest when; • Processes not protected by regulations, patents- In contrast, when licenses and permits are required to do business, such as with the liquor industry, existing firms enjoy some protection from new entrants. • Little customer loyalty- Without strong brand loyalty, a potential competitor has to spend little to overcome the advertising and service programs of existing firms and is more likely to enter the industry. • Low start up costs for new businesses entering the Industry-The less commitment needed in advertising, research and development, and capital assets, the greater the chance of new entrants to the industry Products provided not unique- When the products are commodities and the assets used to produce them are common, firms are more willing to enter an industry because they know they can easily liquidate their inventory and assets if the venture fails. • Low switching costs- In situations where customers do not face significant one-time costs from switching suppliers, it is more attractive for new firms to enter the industry and lure the customers away from their previous suppliers. • Production process is easily learned- Just as competitors may be scared away when the learning curve is steep, competitors will be attracted to an industry where the production process is easily learned. • Easy access to inputs- Entry by new firms is easier when established firms do not have favorable access to raw materials, locations, or government subsidies Access to customers is easy- For instance, it may be easy to rent space to sell produce at a farmer’s market, but nearly impossible to get shelf space in a grocery store. You are more likely to find new entrants in the food business using the farmer’s market distribution system over grocery stores. • Economies of scale are minimal-If there is little improvement in efficiency as scale (or size) increases, a firm entering a market won’t be at a disadvantage if it doesn’t produce the large volume that an existing firm produces. Managing the threat of new entrants • Enhance marketing/brand image • Utilize patents and protection of intellectual property. • Create alliances with associated products Demonstrate ability & desire to retaliate to potential entrants • Set price that deters entry • Increase minimum efficient scales of operations Create a marketing / brand image (loyalty as a barrier) Alliances with linked products / services Tie up with suppliers and distributors. Retaliation tactics. 4. THREAT OF SUBSTITUTES Substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product’s demand is affected by the price change of a substitute product. A product’s price elasticity is affected by substitute products – as more substitutes become available, the demand becomes more elastic since customers have more alternatives.
A close substitute product constrains the ability of firms in an industry to raise prices This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products.
Similarly to the threat of new entrants, the treat of substitutes is determined by factors like • Brand loyalty of customers, • Close customer relationships, • Switching costs for customers, • The relative price for performance of substitutes, • Current trends. -Availability of substitutes intensifies competition within an industry -Threat exists when there are alternative products with lower prices or better performance -It is difficult for a firm to raise prices if there are close substitutes & switching costs are low Factors affecting the threat of substitutes They pose a great threat when; • Your product does not offer better benefits compared to other products-What will hold your customers if they can get an identical product from your competitor? It is easy for customers to switch-A grocer can easily switch from paper to plastic bags for its customers, but a bottler may have to reconfigure its equipment and retrain its workers if it switches from aluminum cans to plastic bottles. • Customers have little loyalty-When price is the customer’s primary motivator, the threat of substitutes is greater. Managing the threat of substitutes • Stay close to customer preferences • Differentiate your product • Advertise, brand • Favorable pricing • Legal actions • Increase switching costs Alliances Customer surveys to learn about their preferences Enter substitute market and influence from within Accentuate differences (real or perceived) 5.
RIVALRY WITHIN THE INDUSTRY Rivalry describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry. What is important here is the number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
Competition between existing players is likely to be high when; There are many players of about the same size, Players have similar strategies There is not much differentiation between players and their products, hence, there is much price competition Low market growth rates (growth of a particular company is possible only at the expense of a competitor) Barriers for exit are high (e. g. expensive and highly specialized equipment). -If the competitive force is weak, companies may be able to raise prices, provide less product for the price, earn more profits eg cutting down on production costs and reducing on quantity hence reduction in prices. If competition is intense, it may be necessary to enhance product offerings to keep customers eg offering free samples ,buying one product and you are giving another one which is identical for free and also mobile phones manufacturers incorporating the calculator and aspotlight on phones. Rivalry within the industry The intensity may arise due to; • Slow rate of growth in demand-causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market. • Slow growth or shrinking market-Causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market. • High fixed costs-Results in an economy of scale effect that increases rivalry . When total costs are mainly fixed costs, the firm must produce near capacity to attain the lowest unit costs.
Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and increased in increased rivalry. • Absence of product differentiation-This is associated with high level of rivalry . Brand identification and tends to constraint rivalry • Perishable products –Causes a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies • Firms competing to be market leader and too many operators • Customers can easily switch between products- Intense rivalry is likely when customers in a given industry can easily switch to other suppliers. In these situations, the businesses in the industry will be vying for market share. There are high costs for exiting the business- If liquidation would result in a loss, businesses that invested heavily in their facilities will try hard to pay for them and may resort to extreme methods of competition. Managing rivalry within the industry • Change prices-raising or lowering to a temporary advantage or avoid price competition. • Improve product differentiation-improving features, implementing innovations in the manufacturing process and the product itself • Creativity using channels of distribution that is novel to the industry • Exploiting relationships with suppliers-eg setting high quality standards and requiring suppliers to meet its demand for product specification and prices Price competition – differentiate your product from competitors • Focus on a unique segment of the market and reduce industry over-capacity • Build customer loyalty • Build stronger relationships by communicating with competitors • Buy out competition. CRITIQUE Porter’s model of Five Competitive Forces has been subject of much critique. Its main weakness results from the historical context in which it was developed. In the early eighties, cyclical growth characterized the global economy. Thus, primary corporate objectives consisted of profitability and survival. A major prerequisite for achieving these objectives has been optimization of strategy in relation to the external environment.
At that time, development in most industries has been fairly stable and predictable, compared with today’s dynamics. In general, the meaningfulness of this model is reduced by the following factors: • In the economic sense, the model assumes a classic perfect market. The more an industry is regulated, the less meaningful insights the model can deliver. • The model is best applicable for analysis of simple market structures. A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, byproducts and segments. A too narrow focus on particular segments of such industries, however, bears the risk of missing important elements.
The model assumes relatively static market structures. This is hardly the case in today’s dynamic markets. Technological breakthroughs and dynamic market entrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times. The Five Forces model may have some use for later analysis of the new situation; but it will hardly provide much meaningful advice for preventive actions. The model is based on the idea of competition. It assumes that companies try to achieve competitive advantages over other players in the markets as well as over suppliers or customers.
With this focus, it dos not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others. Overall, Porters Five Forces Model has some major limitations in today’s market environment. It is not able to take into account new business models and the dynamics of markets. The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way – as a starting point for further analysis. STRATEGY AND POLICY FORMULATION PROCESS Socio-Cultural Factors:
Deep study of local culture and social setups is one of the major factors which account much in successful strategy formation. Varying types of consumer behaviors are found in different cultures. According to Kotler, culture is “the set of basic values, perceptions, wants and behaviors learned by a member of society from family and other important institutions. ” (Kotler et al. 2004) During the formation of marketing strategies, companies have to look after a lot of factors. Deep study of local culture and social setups is also one of the major factors which account much in successful strategy formation. Varying types of consumer behaviors are found in different cultures.
The study of culture helps to understand the consumer behavior and in turn assists firms to improve their marketing strategies by understanding issues like: • The way how consumers think, feel and select between different brands or products. • The psychology of how consumer is influenced by culture, family and social setups. Understanding of these issues helps to adopt better strategies by taking the consumer into consideration. By understanding the consumer, firms will be able to make a more informed decision as to which strategy to employ. (Tahir & Umer 2007) According to Kotler, culture is “the set of basic values, perceptions, wants and behaviors learned by a member of society from family and other important institutions. ” (Kotler et al. 2004)
Each country has its own set of values and traditions. The companies must know that how consumers in different countries think and use different products before planning a marketing program. All the positive and negative impacts which a culture may cause must be identified. There might be different dimensions of culture like the social organization of society, religion, literacy levels, political systems and language. (Kotler et al. 1999) Social factors also influence behavior of consumers. A person’s family, friends and social organizations strongly affect product and brand choices. The person’s position within each group can be defined in terms of role and status.
A buyer chooses products and brands that reflect his or her role and status (Kotler et al. 1999). Culture is the single largest factor in shaping desires and thus behavior. As a child grows up the culture in which he lives impresses his mind with a general set of values and preferences. According to Leon Schiffman and Leslie Kanuk in their book Consumer Behavior, American children receive the following values: achievement and success, activity, efficiency and practicality, progress, material comfort, individualism, freedom, external comfort, humanitarianism, and youthfulness. Much of these values are taught in the American school system – both public and private – where children spend a majority of their waking hours Subculture
Each culture consists of smaller subcultures that include nationality, religion, and geographic regions. The subculture often reinforces the values instilled by the culture at large. For instance, children are taught in the culture, either deliberately or covertly, that youthfulness is a higher value than old age. When they enter their subculture (in this case their general neighborhood) and compare their quality of life to the quality of life in the local area, the value of youthfulness is reinforced. When subcultures gain power and wealth, companies customize marketing messages and campaigns to serve them. This is known as diversity marketing, and has proven to be an effective marketing strategy.
Think about the consequences of a group of consumers who feel ignored by your message. They may fit your definition of a dream client, but if your campaign ignores the subculture they identify themselves with, the message will fall on deaf ears. “Cultural environment is made up of institutions and other forces that affect society’s basic values, perceptions, preferences and behaviors. ” People have their beliefs by living in a particular society. These beliefs may be either core beliefs or secondary beliefs. Core beliefs are inherited from parents, reinforced by religious groups, business and government. These beliefs have a high degree of persistence. While secondary beliefs can be changed more easily.
Marketers have a chance of changing secondary values but it is pretty difficult to change core values. So, Marketers should have a better understanding of the cultural environment of the country before making any business strategy. (Kotler et al. 2004) According to Professor Geert Hofstede, “Culture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best and often a disaster. ” Management is a process which is interconnected with many other parts of life and cannot be isolated separately from what is happening in the society. It interacts with what happens in politics, family, school, government and also related to the religion and local traditions. Cultural Dimensions Model” of professor Greet Hofstede presents a framework describing five different dimensions of values between national cultures. Cultural factors Power Distance: “The degree of inequality among people which the population of a country considers as normal” It means the difference of power and wealth among population of the country. All societies are different with respect to this. But the level of gap in some countries is greater as compared to other ones where it is smaller but it exists in all cultures and societies. In cultures with large power distance, there is respect for old age and status is important to show power. (Hofstede 2005) Individualism verses Collectivism: The extent to which people feel they are supposed to be taken care of or to be cared by themselves, their families or organizations they belong to” There are some societies in which individuals are loosely tied with each other and they are supposed to take care of themselves and look after their immediate family only. in this societies people are not concerned about others but only about themselves “ The I lone aspect”. On the other hand, the societies which we can call collectivistic societies, the people in these societies are integrated in strong groups and family relations (with uncle aunts and grand parents). They take care of each other without any specific interest (Hofstede 2005). Masculinity verses Femininity: The extent to which a culture conducive to dominance, assertiveness and acquisition of things versus a culture which is more conductive to people, feelings and the quality of life. ” The distribution of roles between the genders is another fundamental issue for any society. In masculine societies, roles of genders are clearly distinct i. e. men are supposed to be aggressive, tough and focused on material success, whereas women are supposed to be modest and concerned with the quality of life. While, femininity are those societies where role of genders overlap. It means both men and women are supposed to be tender, modest and concerned with the quality of life i. . (equality between men and women) (Hofstede 2005). Uncertainty Avoidance: “The degree to which people in a country prefer structured over unstructured situations” It deals with the society’s tolerance for unstructured and uncertain situations(risk taker) . It shows that a culture programs its members to feel comfortable or uncomfortable in unstructured situations. Unstructured situations are novel, surprising and different from usual. Uncertainty avoiding cultures avoids such situations by strict rules, security measures and religious believes in absolute truth (risk averse). People belonging to such cultures are more emotional and motivated.
On the other hand, uncertainty accepting cultures are more open to different kind of unstructured situations. (Hofstede 2005) Long Term verses Short Term Orientation: “Long term: values oriented towards the future, like saving and the persistence- short term: values oriented towards the past and present, like respect for tradition and fulfilling social obligations” Long term oriented societies are characterized by persistence and thrift. Where as in short term oriented cultures people are more concerned with the traditions and they have strong social values. (Hofstede 2005) Quantity of life versus Quality of life In some societies people have great concern for quantity of life i. e. iving for a long time but miserable longevity, while in other culture people look at the quality of life Other social cultural factors to be considered in strategy formulation include Changing Demographics, Changing lifestyles, Income distribution, Polarization, Quality of life ,Education and occupation. Changing Demographics Demographic trends are similarly important. It is the social science concerned with the charting of the size and structure of a population of people. The size of the population will obviously be determinant of the size of the workforce and the potential size of markets just as important will be the structure of the population.
The age structure will determine the age of the particular segment and also the size of the working population. Therefore the structure of the population will constantly be changing and these changes will have an impact on the industries and market. Also the birth rate continue to decline as many women make their career a higher priority and this may negatively impact on the population growth. This trend may have an increasing unfavorable effect on most producers of predominantly youth oriented goods. Changing lifestyles Another important aspect that an organization should consider while formulating its strategy is the changing lifestyles The increasing divorce rate, women being more independent and /or marrying later , an increase in he single elderly , are all creating more smaller households, though not necessarily a need for smaller houses. This is leading to higher demand for new house which will in no doubt fuel house prices. This situation may fuel another boom and bust with another future spell of consumers reaction in the light of negative equity and repossession. It may also lead to large volume of households to insure and an increase in mortgage lending both in volume and size. Income distribution The changing employment patterns mean many more people are working for themselves or working on a contract basis, this will result into people’s income fluctuating more widely.
There is the possibility of a large segment of the population becoming relatively poor and unable to meet the cost of adequate risk protection thus contracting the market. Nevertheless, there may be increased need for insurance for small business and private pensions as a result; the organization will have to understand the target market they are dealing with in order to strategize properly Polarization With clear increase of polarized society, organizations should be able to strategize well in order to succeed in capturing the market Prediction for the coming years suggests a society that continues to be polarized. 40% in permanent well paying jobs; 30% on part time or contract work, or self employed ; and 30% unemployed or living of basic state benefits.
People may not be permanently within any category but could drift from one to another as a result; large segments of society may be unable to afford adequate protection, thus diminishing the market size. Social unrest may increase as a result of an increase in drift from permanent and contract jobs to becoming unemployed thus increasing the insurance claims and premiums and having exclusion clauses, thus again diminishing demand. Quality of life This is a social change that has been the accelerating interest of consumers and employees. Evidence of this change is seen in recent contract negotiations. In addition to the traditional for the increased salaries , workers demand such benefits as sabbaticals, flexible hours or four day work week, lump-sum vacation plans and opportunity for advanced training.
Organisation should understand or know the taste and preferences of their society which will play an important part in assisting them formulate strategy that will enable them succeed in the market. Education Employees have different levels of education. As managers prepare strategies for the company, they need to consider knowledge and skill which are changing customer needs and expectations We all know that educated person get easily ready to adopt Education widens a person’s horizons, refines his tastes and makes his outlook more cosmopolitan. An educated person, as compared to somebody less educated, is more likely to consume educational facilities, books, magazines and other knowledge oriented products and services.
For instance, an educated insurance agent gets ready to use agency management software, insurance crm software, and insurance sfa software. While less educated person my not easily adopt such insurance software. Occupation When organizations are formulating their strategies, they also have to take into consideration the occupation of their target market since the occupation also shapes the consumption need. People following specialized occupations such as photography, music, dance, carpentry, etc need special tools and equipment. But, apart from this specific need the status and role of a person within an organization affects his consumption behavior.
Chief executives would buy three-piece suits of the best fabric, hand made leather briefcase and use services of airline and five start hotels. A junior manager or blue collar worker in the same organization may also buy a three-piece suit but he compromise on quality. Asthetics While formulating strategy for an organization consideration should also be given to aesthetics which is a Branch of philosophy that deals with the nature of beauty, especially in art. It attempts to explain the human reaction to beauty, and whether this reaction is objective or subjective; for instance, whether beauty is a universal concept, or whether environment – living conditions, class, gender, and race – affects a person’s taste and what is considered beautiful. Introduction
The external environment affects firm’s growth and profitability. It is critical to firm’s survival and success. The external environment influences the firm’s strategic options as well as the decisions made in light of them. The firm’s understanding of the external environment is matched with knowledge about its internal environment to form its vision, to develop its mission and to take actions that result in strategic competitiveness. Government policies and laws also affect where and how firms may choose to compete. To achieve competitiveness and thrive, firms must be aware of and understand the different dimensions of the external environment.
External environment represents factors beyond the control of the firm that influence its choice of directions and actions of organizations, and internal processes. DEFINATION: Political environment can be defined as:- – That part of external environment that is under either the direct control or influence of the government and or the state. – Is the arena in the external environment in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding the interactions among nations. Therefore, this represents how organizations try to influence government and how governments influence them.
Political constraints are placed on the firm’s through fair-trade decisions, antitrust laws, tax programs, minimum wage legislations, pollution and pricing policies, administrative jawboning, and many other actions aimed at protecting employees, consumer, the general public, and the environment. The objectives that a government may have towards the regulations of business will depend in large part upon the political leaning of the governing party. It is important for managers to monitor government policy to detect changes early so as to respond effectively. Government has direct control or influence to a greater or lesser extent, over:- – Legislation and regulations:- this covers laws that influence employment, consumer protection, health and safety at work contract and trading ,trade unions,monoplies and mergers, tax etc. Economic policy: -particularly fiscal policy. Government usually set policy concerning the levels of taxation and expenditure in the country. – Government –owned business: – nationalized industries, some government retain control over key strategic industries and the way in which these companies are controlled can have ‘knock on’ effect to other parts of the country. – Government international policy:- government intervention to influence exchange rates, and international trade. For example:- – When new rules are adopted based on new laws e.