THE ROLE OF ECOLOGICAL CONSIDERATIONS IN STRATEGIC
MANAGEMENT AND CORPORATE RESPONSIBILITY
ARIZONA STATE UNIVERSITY
WPC 480 - STRATEGIC MANAGEMENT
WEEK 1
A.
Definition of External Environment:
The external environment is an external factor that can influence the choice of
direction and action of a company and affect its organizational structure and internal
processes.
B.
Types of External Environment:
The external environment can be divided into three related sub-categories: factors in
the remote environment, factors in the industrial environment, and factors in the operational
environment.
❖
Remote Environment:
The distant environment consists of factors that come from outside, and are usually
not related to the operational situation of a particular company. This environment provides
opportunities, threats, and constraints for the company, but a single company rarely has a
significant influence on this environment.
For example, if the economy is sluggish and construction projects decline, a
contractor is likely to experience a decline in business, but a contractor's success in
stimulating local construction activities will not be able to lift the overall construction
business. The remote environment consists of economic, social, political, technological, and
ecological factors.
a.
Economic Factors:
Economic factors relate to the nature and direction of the economic system in which a
company operates. Since consumption patterns are influenced by the relative prosperity of
various market segments, in its strategic planning every firm should consider the economic
trends in the segments that affect its industry. Whether at the national or international level,
the company should consider The general availability of credit, the level of disposable
income, and the propensity to spend. Primary interest rates, the rate of inflation, and trends in
GNP growth are other economic factors that must also be considered.
b.
Social Factors:
Social factors that affect a company are the beliefs, values, attitudes, opinions and
lifestyles of people in the company's external environment, which develop from cultural,
ecological, demographic, religious, educational and ethnic influences. If social attitudes
change, so does the demand for various types of goods and services. Social factors are
dynamic and ever-changing as a result of people's efforts to satisfy their wants and needs
through controlling and adjusting to environmental factors.
One of the most prominent social changes has been the entry of large numbers of
women into the labor market. This has not only affected the hiring and compensation policies
and resource capabilities of employers, but has also increased the demand for a variety of
products and services that are needed in the absence of women at home. Companies that
anticipated or reacted quickly to this social change offer products and services such as fast
food, microwave ovens, and daycare centers.
c.
Political Factors:
The direction and stability of political factors are important considerations for
managers in formulating corporate strategy. Political factors determine the legal and
regulatory parameters that limit a firm's operations. Political constraints are imposed on the
firm through decisions about fair trade, antitrust laws, taxation programs, minimum wage
provisions, policies on pollution and pricing, administrative restrictions, and other measures
intended to protect workers, consumers, the general public, and the environment.
Since such laws and regulations are usually restrictive, they tend to reduce a
company's profit potential. But various political measures are designed to protect and benefit
companies, such as patent laws, government subsidies and product research grants.
Thus, political factors can be either limiting or beneficial to the firm. In addition,
political activities also have a major impact on two government functions that affect a
company's remote environment: the supplier function and the customer function.
d.
Technology Factors:
To avoid obsolescence and encourage innovation, companies must be aware of
technological changes that may affect their industry. Creative technological adaptation can
open up opportunities for the creation of new products, the refinement of existing products, or
improvements in production and marketing techniques.
Technological breakthroughs can open up new markets and sophisticated products or
they can shorten the life of production facilities. Technology forecasting can help protect and
enhance the capabilities of companies in growth industries. It makes strategic managers
aware of challenges and promising opportunities.
The key to useful forecasting of technological progress lies in accurately estimating
the impact of technological change future and its possible impact. A thorough analysis of the
impact of technological change includes a review of the expected impact of the new
technology on the remote environment, on the business competition situation, and on the
business-society interface.
e.
Ecological Factors:
The term ecology refers to the relationship between humans and other living things
and the air, land and water that support their lives. Threats to our life-supporting ecology
caused primarily by human activities in an industrialized society are commonly referred to as
pollution.
As the main cause of ecological pollution, businesses now bear the responsibility to
eliminate the toxic side effects of their industrial processes and to clean up the environment
that has been polluted by their previous actions. Managers are now required by the
government or expected by society to consider ecological issues in their decision-making.
C.
Industrial Environment:
The nature and degree of competition in an industry depends on five forces or factors,
including: the threat of new entrants, the bargaining power of buyers (customers), the
bargaining power of suppliers, the threat of substitute products or services (if any), and the
fight among industry members (competition participants). The strongest competitive factor
will determine the viability of an industry. It is therefore the most important factor in strategy
formulation.
Every industry has an underlying structure, a set of economic and technical
characteristics, which gives rise to these competitive forces. Some of the characteristics that
are critical to the strength of each competitive factor are as follows:
1. Threat of Entry:
New entrants into an industry bring with them new capacity, a desire to capture a
share of the market, and often considerable resources. The magnitude of the threat of entry
depends on the existing barriers to entry and the reaction of the existing competitive
participants to the potential new entrant's expectations.
If entry barriers are high and the potential new entrant expects to face strong
resistance from existing competitors, the new entrant is clearly not a serious threat. There are
six main sources of entry barriers, including :
▪ Economies of scale
▪ Product Differentiation
▪ Capital Requirements
▪ Barriers Cost Not Due to Scale
2. Strong Suppliers:
▪ Access To Distribution Channels
▪ Government Policy
Suppliers can utilize their bargaining power over industry members by raising prices
or lowering the quality of the goods and services they sell. A strong supplier can squeeze the
capacity of an industry that cannot keep up with rising costs by raising its own prices.
The strength of each supplier (or buyer) depends on a number of characteristics of its
market situation and on the relative importance of its sales or purchases in the industry
compared to its overall business. A supplier group is said to be strong if :
▪ This group is dominated by a few companies and is more concentrated than the industry
they sell their products in.
▪ The supplier's product is unique or at least differentiated, or if there is a switching cost,
the switching cost is a fixed cost that must be borne by the supplier borne by the buyer if
they change suppliers.
▪ Suppliers do not compete with other products in the industry.
▪ Suppliers have the ability to integrate forward into the buying industry. This gives the
supplier the power to force the industry to accept the purchasing terms set by the
supplier.
▪ Industry is not an important customer for suppliers. If the industry is an important
customer, the fate of the supplier will largely depend on the industry in question, and
they will seek to protect the industry through reasonable pricing and support in activities
such as R&D and lobbying.
3. Powerful Buyer:
Buyers or customers may also pressure prices, demand higher quality or more
services, and pitting industry members against each other. All of these can lower industry
profits. A buying group is said to be strong if :
▪ Buyers are concentrated or buy in large quantities (volume).
▪ Products purchased from the industry are standardized or undifferentiated.
▪ Products purchased from industry are an important component of the buyer's product and
are a considerable cost component.
▪ The buyer receives a low profit. This will encourage buyers to reduce their purchase
costs.
▪ Industrial products are not important to the quality of the buyer's product or service. If
the buyer's product quality is heavily influenced by the industry product, the buyer will
generally be less price-sensitive.
▪ Industrial products do not generate savings for buyers. When the product or industrial
services provide great benefits, buyers are less price-sensitive; instead, they pay more
attention to quality.
▪ Buyers have the ability to integrate back.
▪ Consumers tend to be more price-sensitive if they buy products that are undifferentiated,
expensive relative to their income, and if quality is not very important to them.
4. Substitute Product:
By setting a ceiling, substitute products or services limit the potential of an industry.
If the industry is unable to improve product quality or differentiate, profits and industry
growth may be jeopardized. Strategically viable substitutes are products that are :
▪ The quality can match the quality of industrial products or,
▪ Produced by industries that enjoy high profits.
5. Substitute products often enter the industry quickly if there is intense competition in their
own industry resulting in lower prices or improved performance.
6. Competition Among Industry Members Competition among industry members
Competition occurs as they jockey for position, using tactics such as price competition,
product introductions, and advertising wars. Such intense competition stems from the
following factors:
▪ Competition participants are numerous and more or less equal in terms of size and
strength.
▪ Industry growth was slow, sparking a war for market share involving companies looking
to expand.
▪ The product or service is undifferentiated or does not require switching costs. If the
product is differentiated or involves switching costs, the buyer will be tied to one
supplier and the supplier will be protected from incursions by its competitors.
▪ High fixed costs or perishability invites a strong desire to lower prices.
▪ Capacity addition must be in large quantities.
▪ High exit barriers. Such as the existence of specialized assets or management attachment
to a particular business, forcing companies to continue to survive even though they may
have to accept low or even negative ROI.
▪ Competitors are diverse in terms of strategies, origins, and "personalities".
D.
Industry Analysis and Competition Analysis:
In analyzing the industry and competition, company executives need to think about
four questions, namely:
1. What are the industry boundaries?
2. What is the industry structure?
3. Who are our competitors?
4. What are the main factors determining competition?
The answers to these questions provide a basis for considering the right strategy for
the company in question.
E.
Industry Boundary:
An industry is a collection of companies that offer similar products or services.
"Similar products" are defined as products that are viewed by customers as substitutable.
Industry designation is important because
1. Help executives define the company's competitive arena.
2. Focusing attention on the company's competitors.
3. Help executives determine key success factors.
4. Provide foundation for executives to evaluate the company's objectives.
Defining industry boundaries is a very difficult task. This difficulty comes from three
sources, namely:
1. The evolution of the industry each time brings new opportunities and threats.
2. Evolution industry creating industry within industries.
3. The industry is increasingly global in scope.
To realistically define their industry, executives need to examine five things,
including:
1. Which parts of the industry are related to our company's goals?
2. What are the critical success factors?
3. Does our company have the expertise needed to compete in that part of the industry? If
not, can we develop that expertise?
4. Will these skills allow us to capitalize on opportunities and overcome upcoming threats?
5. Is our definition of industry flexible enough to allow us to adjust our business concept as
the industry evolves?
F.
Industry Structure:
Structural attributes are certain characteristics that give an industry its distinctive
character. Take for example the cable television and financial services industries. Both
industries are competitive, and both are important to our quality of life. But they have very
different requirements for success.
To succeed in the cable television industry, companies need vertical integration
technological innovation, to expand the scope of their services and deliver them in new ways;
and extensive marketing, using appropriate segmentation techniques to find potential
interlopers.
Meanwhile, to succeed in the financial services industry, companies must meet
completely different requirements, including customer orientation and a large capital base.
There are four variables within an industry that need to be examined, including:
1. Concentration. This variable refers to the extent to which industry sales are dominated
by only a few firms. High concentration serves as an entry barrier into an industry, as it
allows firms to control a large share of the market to achieve large economies of scale
(e.g., saving on production costs due to increased production costs quality of production)
and, thus, depress their prices to discourage new entrants from entering the market.
2. Economies of scale. This variable refers to the savings that firms in an industry gain
due to increased volume. In simple terms, as the volume of production increases, the
long-run average cost of a unit produced decreases.
3. Product Differentiation. This variable refers to customers perceiving the products or
services offered by companies in the industry to be different. Product differentiation
can be real or perceived. Both of these differentiations often sharpen competition
among existing firms, conversely, successful differentiation makes it difficult for new
entrants to enter the industry.
4. Barriers to Entry. Entry barriers are hurdles that companies must overcome to enter
the industry. These barriers can be both tangible and intangible. If there are high entry
barriers in an industry, then competition in that industry will decrease over time.
An analysis of concentration, economies of scale, product differentiation, and barriers
to entry in an industry enables company executives to understand the forces that determine
competition in an industry and provides a basis for identifying the company's competitors and
how to position themselves in the market.
G.
Competitor Analysis:
Competitor analysis usually has the following objectives:
1. Identify existing and potential competitors.
2. Identify possible competitor moves.
3. Assist companies in developing effective competitive strategies.
In identifying existing competitors or competitors potential competitors, executives
consider several important variables, namely:
1. How do other companies set their market coverage boundaries?
2. How similar are the benefits perceived by customers from products and services offered
by other companies?
3. How committed are other companies to the industry?
H.
Operational Environment:
The operational environment, also known as the competitive or task environment, is
usually much more influenceable or controllable by the company than the remote
environment. Thus, companies can be more proactive (rather than reactive) in dealing with
the operational environment than in dealing with the remote environment. The operational
environment consists of factors in the competitive situation that affect a company's success in
gaining market share resources needed or in marketing its products and services profitably.
These factors can be described as follows:
1. Competitive Position:
Assessing competitive position can increase a company's opportunity to design
strategies that optimize opportunities arising from the environment. Developing a competitor
profile allows a company to more accurately estimate both its short- and long-term growth
potential, as well as its profit potential.
2. Customer Profile:
Developing a profile of a company's customers and potential customers improves its
managers' ability to plan strategic operations, to anticipate major market changes, and to
reallocate resources to support changing demand patterns. Traditional approaches to
segmenting customers are based on customer profile organized by information
The first approach is to segment the industrial market: geographic, demographic,
psychographic, and buyer behavior. The second approach is to segment the industrial market.
3. Supplier:
Companies always depend on suppliers for financial support, services, raw materials,
and equipment. In addition, there are times when companies make special requests such as
fast delivery, soft credit terms, or special-sized orders. Especially at such times, it is
important for a company to have a good relationship with its suppliers.
4. Creditors:
Since the quantity, quality, price, and accessibility of financial, human, and raw
material resources are rarely ideal, an assessment of suppliers and creditors is essential for an
accurate evaluation of the company's operating environment.
5. Human Resources: Nature of Labor Market Ability of the company to attract
Recruiting and retaining competent employees is critical to the success of the company.
However, a company's employee recruitment and selection environment is often influenced
by the nature of its operating environment. A company's access to the employees it needs is
primarily influenced by the following three factors:
a.
The company's reputation as a provider of employment opportunities.
b.
Local employment rate.
c.
Availability of people with the required skills.
GLOBAL ENVIRONMENT
A.
Environment (Global Strategy):
A global strategy emphasizes economies of scale and offers more opportunities to
leverage innovations developed at the firm level or within a country or in other markets.
Global strategies have low risk, but may miss growing opportunities in local markets, either
because those markets do not present opportunities or because those opportunities require
products to be customized to local markets.
As a result, these strategies are not responsive to local markets and are difficult to
manage due to the need to coordinate these strategies and operating decisions across
countries. As a result, the achievement of efficient operations requires sharing of resources
and emphasis is placed on coordination and cooperation between units across the country.
This strategy is widely applied by Japanese companies. So, the definition of a global strategy
is a strategy that emphasizes product standardization across all markets. Thus, the
competitive strategy is centralized and controlled by the head office.
B.
Stages of Entering the Global Market:
Globalization requires companies to compete and operate efficiently, effectively and
economically in the global market. The stages of entering the global market are:
1. Domestic Stage:
At this stage the company concentrates its activities only on meeting and serving the
market, dealing with suppliers and competitors within the country. Their orientation is
"ETHNO CENTRIC", i.e. that the nature of the market or consumers everywhere will be the
same. Thus management views the domestic market as dense with much safer opportunities.
This is possible because the domestic market has not yet been penetrated by foreign
companies. The domestic strategy also divides authority by giving each business considerable
autonomy. Strategies: establish branch companies, provide franchises.
2. International Stage:
As competition intensifies and the domestic market becomes saturated, companies
have begun to expand their production, marketing and other activities outside their parent
country. The orientation of international companies is still "ETHNO CENTRIC", where the
motivation to enter the international market is still solely to throw excess products or extend
the life cycle of the company's products.
This strategy uses exports and licenses to enter the global market. Favorable, where
local response rate low and little cost reduction. Example Harley Davidson.
3. Multinational Stage:
Companies begin to invest and produce their goods abroad by applying different
strategies to one country to another, because companies assume that each country has
different consumers and environments. Example The Body Shop.
4. Global Stage:
At this stage the company begins to carry out a global marketing strategy by focusing
on the global market and producing with resources from within the country or one of the
countries. With this strategy the company will benefit in terms of lower costs. Example
Caterpilar.
The characteristics of globally oriented companies include:
• Plants and facilities are located on a global basis.
• Compound material raw materials and services produced on a global basis.
• Product design and process technology for the entire world.
• Demand is not based on local alone.
• Logistics and inventory control are global.
• Global companies are organized through divisions globally.
5. Transnational Stage:
At this stage the company begins to dominate markets and industries around the world
(Global) by combining global costs with profit-making goals. Orientation: Geo centric. For
example: Electrolux, designed the washing machine in Italy, manufactured and tested it in
Sweden and finally produced it on a large scale in the United States.
C.
Advantages & Disadvantages of Globalization:
The advantages of Globalization are:
• Increase sales and profits by capitalizing on new growth market opportunities.
• Increase the availability of cheap raw materials.
• To improve competitiveness (high quality of products and low cost).
The weakness of Globalization is :
• Volatile environment, ranging from political, economic, legal, social, cultural. So the
company's goals are not achieved. Interaction with various complex nations with diverse
economic, social, cultural and so on.
• Communication becomes difficult due to differences in language, geography, cultural
differences and so on.
• Information critical to planning in terms of availability, depth and accuracy varies
widely.
• It is difficult to analyze current and future competition in many countries, due to
differences in industry structure and business practices.
D.
Factors Affecting the Global Market:
There are several factors that affect the global market, among others:
• Global markets face high variations in the political, economic, legal, social and cultural
environments as well as currency exchange rates of each country.
• The interaction between the domestic & global environment involves issues of
sovereignty of countries with very different economic & cultural conditions.
• There is very difficult communication & control between the head office and its overseas
branches due to differences in geography & variations in business activities between
countries.
• The global market is highly competitive due to the different industrial structures of each
country.
• The global market limits companies in determining their competitive strategies due to
various kinds of regional or international integration such as: ASEAN, EEC, AFTA and
so on.
E.
Reasons Companies Enter the Global Market:
In a situation and condition that continues to grow, many companies make the
decision to expand their business internationally. There are various strong reasons that
underlie the company to become global, including the following:
1. Gaining Economies of Scale
With the standardization, the company will get a "high Scale of Economic"
because the current product is not depends only on the domestic market, but more on the
volume of products that can be sold throughout the world. Coca Cola is a company that
standardizes its brands, recipes and product advertising around the world.
2. Creating Global Perception
The same consumer perception around the world due to standardization will bring
benefits to the company. For example: Honda, Yamaha, Sony and Canon operate in
markets where quality technology is important, so consumers everywhere will have
similar perceptions of these products.
3. Obtaining the Intensive Issued by a Country
Companies can take advantage of opportunities that arise in a country due to
special incentives, for example:
-
Business License Processing
-
Business Place/Location
-
Relatively low tax rate
4. Cross Subsidization
Going global allows companies to cross-subsidize, i.e. allocate resources from
one country to another in order to strengthen their competitive strength.
5. Gaining Access to Cheap Labor and Raw Materials
6. Gaining Access to Technology and Information
7. Gaining Market Access
F.
Global Strategies:
There are two global market strategies, namely:
1. Standarizing Strategy:
-
Focus on standardization: product, packaging, marketing to achieve economies of scale.
-
An image of the country of origin.
Reasons that encourage standardization strategies include:
-
The company has only one source of production,
-
Competitors also market standardized products,
-
The main international market entry strategy is exporting,
-
Marketing addressed to the same countries,
-
Product usage is mainly in urban environments,
-
There is a similarity of taste.
The benefits of standardization are:
-
Scale economy in development: Advertising, packaging, promotion etc.
-
Competitive exploitation of media exposure to consumers.
-
Risk reduction from the sentiment of association of a global brand's presence in the host
country.
2. Customizing Strategy:
Products, packaging, marketing are developed locally, due to the different
characteristics between countries. The reasons that drive the customization strategy include:
-
The technical standard requirements of a country.
-
Products are consumer products and for personal use.
-
There is variety tastes and customer needs.
-
There are differences in purchasing power between countries, due to differences in
income per capita.
-
Successfully implemented by competitors.
-
There are variations in usage such as climate,
behavior and others.
The benefit of customization is that names, associations, and advertising can be:
locally developed, tailored to the local market, selected without the standardization
constraints of local buyers.
G.
Global Market Entry Strategy:
There are several ways to enter the global market, including:
1. Doing Direct Exports:
The company exports directly by selling its products directly to foreign countries
or through distributors who represent the sales activities.
2. Issuing Licenses:
Licensing is an easy way to enter the international market. For example, coca cola
manufacturers do their international marketing with bottling licenses or bottling rights
worldwide. Coca cola only supplies the syrup or raw materials and provides training to
produce, distribute and sell. The disadvantage of this license is that the company has little
control over the licensees and can creating new competitors when the licensee is no longer
dependent on the licensor.
3. Franchising:
A written form of cooperation between the franchisor & franchisee, where the
franchisee is given the right to distribute certain products / services within a certain period
& area and in a manner determined by the franchisor. Example: McDonald's. A&W, Es
Teller 77 & Kentucky Fried Chicken.
4. Joint Venture:
A partnership agreement between a foreign & local investor to establish a local
business, with both sharing ownership & control. The advantage of this method is the
sharing of risk & the ability to combine two strengths to create synergies. Example:
Maybank of Malaysia in partnership with Nusa Bank of Indonesia to form Maybank Nusa.
5. Purchase/Possession of an Existing Company (Acquisition):
For example, Sony bought the American movie company Columbia Pictures.
6. Cooperation & Joining with Domestic / Overseas Companies (Global Alliances):
Example: IBM formed cooperation with Japanese companies, such as Ricoh to
manage the distribution of its computer sales, with Nippon Steel in system integration,
NTT in value-added networks & for financial matters used Fuji Bank.
H.
Barriers to Entering the Global Market:
Barriers to entering the Global Market include:
1. Trade Restrictions and Import Duty Tariffs Form Such Barriers based on regulations made
and deliberated by the European Economic Community (EEC) in 1958, then AFTA (Asean's
Free Trade Area) in 1992. Even the United States also issued or stipulated An agreement on
global trade that results in goods or products entering a country must pass through a fairly
"confusing" administration.
And it's not just the administration/entry fees that are issued, also Quotas that
determine the number of products or goods must be limited. One more thing that becomes an
obstacle in global trade is an embargo carried out by a country that can curb and reject a good
or product that enters the trade area in that country.
2. Language, Socio-Cultural Differences:
Differences in language are often an obstacle to the smooth running of International
Business. This is because language is a vital communication tool, both spoken and written.
Example: The Chevrolet Car Factory which gives the name of a type of car with the name
"Chevrolet's Nova" even though in Spain the word "No Va" means "unable to walk".
Therefore, it is very difficult to market the product in Spain.
3. Operational Barriers:
One illustration, if there are global market activities that occur in two countries that
have a very long cross distance, then the country that acts as a seller will think about the
operation of shipping goods. Because the longer the distance traveled, the greater the
operational costs incurred.
4. Political, Legal and Statutory Barriers For example, the U.S. did:
Embargo on trade commodities with communist countries. Another example: Indonesia
prohibits the export of raw leather or raw rattan outside the country.
5. Think Globally, Act Locally:
The challenge faced in global strategy is to identify and determine the linkage of
target markets with suitable products (goods and services). The basis is to understand the
cultural network, this is for the exploitation of unique markets that accept modifications
through global marketing programs into the suitability of local market needs. The perspective
in linking global markets is based on the similarities between countries and the cultures that
surround them or when there are domestic differences within a country.
The implementation of a global strategy depends on the ability to integrate and
coordinate marketing programs around the world. Then for effectiveness, it must be linked to
what encompasses the local realities of its market.
There are several indicators that can make a strategy global including:
▪ The main competitors in key markets are not from the country itself and are in different
countries.
▪ Standardization of some elements of the product or marketing strategy provides an
opportunity to achieve economies of scale.
▪ Costs can be reduced and effectiveness can be increased by selecting locations where
value-added activities exist in different countries.
▪ Competitors have the potential to use their volume and profits from a market to
subsidize the acquisition of other positions.
▪ Trade barriers as the main barrier to entry in the market.
▪ A global brand name can be an advantage.
▪ If the local market is not a product or service requirement for companies that have the
advantage of operating locally.
INTERNAL ANALYSIS
A.
Importance of Internal Analysis:
Understanding and knowing the opportunities and threats is not enough, companies
must find their identity and capabilities in their organization so that these opportunities and
threats can be utilized effectively and efficiently so that company goals can be achieved. The
main focus as well as the reason for the importance of analyzing the internal environment is
the effort to identify the strengths and weaknesses of the company.
Strength is a condition in which the company is able to carry out all its tasks well.
Conversely, weakness is a condition where the company is less able to carry out its duties
well because it has limitations or deficiencies in resources, skills, and knowledge and
capabilities that seriously hinder the company's effective performance.
Another factor as a reason for the importance of internal environmental analysis
carried out by managers is the conditions of uncertainty, complexity and conflict faced in the
organization. Managers face conditions of uncertainty in terms of the emergence of new
technologies, rapid changes in economic and political trends, changes in social values, and
shifts in consumer demand. The uncertainty of the internal environment will increase the
complexity and number of issues that managers must observe when studying the internal
environment.
B.
Components of Environmental Analysis:
Factors Main factors analysis internal environment analysis are:
1. Marketing
2. Finance and Accounting
3. Production, Operations and Engineering
4. Personnel
5. Quality Management
6. Information System
7. General Organization and Management
Internal environmental factors are defined by experts differently in their grouping. But
in general there are five factors that must be considered in analyzing the internal
environment:
1. Marketing elements and marketing factors.
2. Financially, strategists need to analyze the company's financial management as reflected
in the financial statements.
3. Human resources, human resources are the most important factor because it is humans
who will make decisions for all organizational functions.
4. Operations, the things that need to be analyzed are how the company's services to
consumers or customers.
5. Organizations, things that need to be analyzed are about organizational structure,
corporate image and prestige, organizational atmosphere, culture or organizational
culture.
C.
Internal Analysis Components:
1. Company Resources:
Experts differ in defining human resources. For example, some define it as everything
that is considered a company's strengths and weaknesses. Other experts consider resources as
a collection of available factors that the company controls or owns. In a broader sense,
resources are inputs to the company's production process.
From these several definitions, company resources can be grouped into two:
a.
Tangible Resources:
The main characteristic of these tangible resources is that they can be more directly
defined and estimated in value.
1) Financial Resources
-
The company's borrowing capacity.
-
Capabilities company to generate internal funds.
2) Physical Resources
-
Sophistication and factory location.
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Access to raw materials.
3) Human Resources
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Training, experience, judgment, intelligence, outlook, adaptability, commitment, and
loyalty of managers and workers.
-
Organizational resources.
-
Formal reporting structures and the company's formal planning, control and coordination
systems.
b.
Intangible Resources:
In contrast to tangible resources, intangible resources are invisible, more difficult for
competitors to understand and imitate. Managers prefer to use intangible resources as their
source sustainable competition.
For example, a brand name is perhaps the most important means to a sustainable
competitive advantage for many companies. Products with strong brand names will provide
high value to consumers. In this case, managers are required to understand the strategic value
of the company's tangible and intangible resources.
The strategic value of a company's resources is characterized by the extent to which it
contributes to development capabilities, core competencies, and ultimately competitive
advantage competitive advantage and sustainable competitive advantage.
1) Technology Resources:
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Technology inventories, such as patents, trademarks, copyrights and trade secrets.
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The knowledge needed to implement it successfully.
2) Resources for Innovation:
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Technical worker.
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Research facilities.
3) Reputation:
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Reputation with consumers.
-
Name Product, perception regarding the quality of the product and its durability.
-
Reputation with suppliers.
2. Company Capability:
Capabilities Company is the capacity company in using integrated resources to
achieve the company's goals. The sum of human knowledge and capital is one of the firm's
most significant capabilities and is the root of all competitive advantage. Human knowledge
is seen as the sum of everything that each person in the firm knows that gives the firm the
ability to compete in the market.
Any competitor can come in and use the same machines and the same equipment. But
competitors cannot simply copy the commitment and capabilities of another company. Today
some companies are seeking to better integrate and coordinate their training programs to
enable each worker to develop the competencies needed to get the job done efficiently and
effectively. Skills are often developed in functional areas, such as production, R&D,
marketing and others.
3. Core Competencies:
The purpose of implementing a value-creating strategy is to improve the efficiency
and effectiveness of the company with the aim of achieving strategic competitiveness and
above-average profits. Not all company resources and capabilities are important strategic
assets.
Core competencies are a company's resources and capabilities that are a source of
competitive advantage over its competitors. A company with insufficient financial capital
cannot buy facilities or hire workers whose skills are needed to produce products that provide
high value to consumers. Capabilities become core competencies if they can help the
company produce distinctive products (goods and services with properties and characteristics
that consumers value).
D.
Identification of Internal Factors
Approaches that a manager needs to consider when identifying internal company
factors:
1. Functional Approach
According to approach According to the functional approach, the competencies
(strengths and weaknesses) of the company can be seen in the various business functions that
exist and are carried out in the company, including:
a.
Marketing Field Functions
The main function of this field is to convey and move goods and services from
producers to consumers through predetermined channels. In this case, it is necessary to pay
attention to several key marketing factors to build a competitive advantage in an increasingly
segregated market:
1) Market share and market segmentation. How much the company controls and which
segment groups have been entered.
2) Product and service mix. How the quality of goods sold, efficient and effective sales
force. Close relationships with key customers.
3) Effective after-sales service.
4) Public image of the company and loyalty formation.
5) Effective advertising.
6) Effective pricing strategies for products and services.
7) Efficient distribution channels.
b.
Finance Function:
1) Management finance deals with three main functional activities:
-
Activity use of funds
-
Funding activity
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Asset management activities
Internal financial factors as follows:
-
Efficient and effective financial planning, working capital and capital budgeting
procedures.
-
Accounting system for efficient and effective planning, cost budget, profit and audit
procedures.
-
Total financial resources and their strength: liquidity, leverage, profitability, activity and
cash flow.
-
Low cost of capital in relation to the industry and competitors.
-
Inventory valuation policy.
-
Friendly relations with owners and shareholders.
c.
HR Field Functions:
Internal HR factors include high quality employees, effective organizational structure
and atmosphere, low labor costs, strategic management system, effective relationship with
labor unions, history, and the ability to work together company in achieving goals, influence
on government agencies, company image and prestige, company size in relation to the
industry, efficient and effective labor relations policies.
d.
Production and Operational Functions:
Key internal production and operational factors include capacity to meet market
demand, adequate availability of raw materials, strategic location of facilities and offices,
efficient and effective inventory control systems, efficient and effective equipment and
machinery, vertical integration or effective supplier relationships, efficient and effective
offices, etc.
e.
Function of Research and Development
2. Value Chain Approach:
The three stages of Value Chain analysis are:
-
Identify Value Chain activities.
-
Identify Cost Drivers at each value activity.
-
Develop a competitive advantage by reducing costs or adding value.
-
Identify competitive advantages.
-
Identify opportunities for added value.
-
Identify opportunities to reduce costs.
3. PIMS Approach:
In this analysis, what will be used is which strategy provides benefits for the
company. In this analysis, the measure is the strategic model used and the rate of return on
capital obtained by the company.
Characteristics of PIMS:
-
Investment intensity
-
Market share
-
Market growth
-
Product life cycle
-
Ratio of marketing expenses and sales volume
A high ratio of investment to sales in anticipation of market growth leads to low cash
inflows and ROI, while cash outflows are very large. This effect becomes more significant, if
the company has a high amount of fixed assets. Meanwhile, the size of the market share has a
positive effect on the amount of ROI and cash inflow. The greater the market share, the
greater the ROI and cash inflow achieved.
4. 7-S Approach:
Mc Kinsey's 7-S model is a widely discussed framework for looking at the
interrelationship between strategy formulation and implementation. This model helps
managers to focus attention on the importance of linking the chosen strategy to the various
activities that can affect the implementation of the strategy. This approach requires knowing
and evaluating seven organizational variables, namely:
1. Structure, the framework within which the activities of the organization's members are
coordinated.
2. Strategy, the route that the organization has chosen for its future growth.
3. Staff, human resources of the organization.
4. Style, the leadership approach of top management and the operational approach of the
entire organization.
5. System and procedure, formal and informal procedures including innovation system,
compensation system, driver's license, and capital allocation system.
6. Skill, what the organization does best, the specific capabilities and competencies that exist
within the organization.
7. Shared values, (superordinate) concepts and guiding principles of the organization, values
and aspirations.
E.
Evaluation of Internal Variables:
After the variables have been identified through several approaches, the next process
in the Analyzing the company's profile (strengths and weaknesses) is an assessment
(evaluation of these internal variables). To conduct internal variables, some standards are
needed to determine whether these variables are included in the company's strengths and
weaknesses.
There are four basic perspectives that strategic planners need to use in evaluating
internal strategic variables, namely:
1. Comparison with Past Performance:
In this case, the strategy designer uses the company's historical experience as a
basis for evaluating internal variables. Managers are usually most aware of their
company's capabilities and problems because they are involved and experienced in the
company's finance, marketing, production, R&D activities. Therefore, it is not surprising
that this approach is considered subjective. So, by using only historical experience as the
basis for the evaluation of internal variables identifying strengths and weaknesses may
lead to inaccuracies. However, it should be noted that this approach is very widely used, as
it is easy to do.
2. Stages in Industrial Evolution
The conditions for success necessary for a company to successfully market its
products are largely influenced by the product itself. The forces required for success will
change in the growth stage. Rapid growth attracts competitors to the product market. At
this stage, factors such as brand recognition, industry differentiation and financial
resources to support both large marketing expenditures and the impact of price or cash
flow competition can be key forces.
In times of decline, the most important factors are cost advantage, good supplier or
customer relations and financial control. Competitive advantage can be obtained at this
stage, at least temporarily. If the company is in a slowly shrinking market and competitors
choose to leave.
3. Comparison with Competitors
The main concern in determining a company's strengths and weaknesses is to
compare them relatively with the strengths and weaknesses of competitors, especially
major competitors. Firms in the same industry often have different expertise, marketing,
financial resources operating facilities and locations, technical know-how, brand image,
degree of integration, managerial capabilities, and so on. These different internal
capabilities can become relative strengths and weaknesses depending on the strategy the
firm chooses.
In choosing a strategy, managers must compare the company's key internal
capabilities with those of the company's internal competitors. Thus, the company can find
its strengths and weaknesses.
4. Comparison with Industry Success Factors
In this approach, not only the main competitor companies are observed for
comparison, but the industry as a whole. Managers need to identify the key success factors
of the industry. These include, for example, competitor characteristics, consumer needs
and bargaining position, vertical integration, barriers to market entry and exit, availability
of substitutes, and supplier bargaining position.
F.
Company Profile Matrix:
The company profile matrix attempts to quantify the strengths and weaknesses of the
variables that have been identified and evaluated. However, it is important to understand that
even quantification cannot completely abandon the role of management judgment. Although
there is no standard The standardized number of variables to be assessed in the company
profile matrix, but the preparation of the matrix will simply follow the following pattern:
(Rangkuti F. 1997).
1. Determine the factors that are the strengths and weaknesses of the company in column 1.
2. Weight each factor on a scale ranging from 1.0 (most important) to 0.0 (least important),
based on its influence on the company's strategic position. All these weights should not
exceed the total scale.
3. Calculate the rating (in column 3) for each factor by giving a scale ranging from 4
(outstanding) to 1 (poor), based on the influence of the factor on the condition of the
company concerned. Positive variables (variables categorized as strengths) are given a
value ranging from +1, to +4 (excellent) by comparing them with the industry average or
major competitors. Meanwhile, variables that are negative are the opposite.
4. Multiply the weights in column @ by the ratings in column 3, to obtain the weighting
factors in column 4. The result is a weighting score for each factor that varies in value
from 4.0 (outstanding) to 1.0 (poor).
5. Use column 5 to provide comments or notes on why certain factors were chosen, and
how their weighting scores were calculated.
6. Add up the weighting scores (column 4), to get the total weighting for the company in
question. This total score shows how a particular company reacts to its internal strategic
factors. This total score can be used to compare the company with other companies in the
same industry group.
