CHAPTER 2
LITERATURE REVIEW
2.1 Definition of Strategy
“A strategy consists of the competitive actions and business approaches used by a
management team to establish a customer base, compete with other organizations, conduct
operations, develop and grow the business, and achieve established objectives. An organization’s
business model consists of the economics of the organization’s strategy to achieve a positive
revenue and profit margin. The company’s business model depends on its strategy. The business
model will only be as successful as the organization’s strategies. Identifying a competitive
strategy depends on the strategy making and execution process. The strategy must be aligned
with organizational priorities and marketplace events. In addition to determining the appropriate
strategy, strategy execution is temporally dependent upon other organizational activities”.
According to Danna and Porsche (2008)
Thompson JR, Strickland III and Gamble (2008) defined company’s strategy is
management’s action plan for running the business and conducting operations. The crafting of a
strategy represents a managerial commitment to pursue a particular set of actions growing in
business, attracting and pleasing customers, competing successfully, conducting operations, and
improving the company’s financial and market performance.
Robbins and Coulter (2012) stated that strategies are the plans for how the organization
will do what it’s in business to do, how it will compete successfully, and how it will attract and
satisfy its customers in order to achieve its goals.
As a conclusion from these various sources, a strategy is a plan of action that is designed to
achieve a desired or overall major goal, which generally involves setting goals, determining
actions to achieve the goals, and mobilizing resources to execute the actions.
2.2 Definition of Strategic Management
“Strategic management provides a framework to incorporate external information about
patient perspectives and related budgeting considerations into the strategic planning process,
thereby helping to inform decisions on what products and services to produce and how
production should occur. The framework facilitates the comparison of alternative uses of
resources in terms of what is produced, how much value is created, and production cost.
Strategic management facilitates arranging an organization’s resources to produce valued
products and services for customers and maximize the value of the organization. The approach
focuses on accomplishing three objectives:
•
Organizing and controlling assets
•
Identifying and producing goods and services valued by customers
•
Establishing a vision and resource plans that are within the organization’s financial
constraints
With strategic management, an organization assesses its goals and resources as they relate
to the needs of its community to determine the optimal positioning of its assets on an ongoing
basis.
An organization must view its services from the perspective of its customers to satisfy this
requirement.
Establishing a vision and resource that plans are financially viable. Strategic management
recognizes that budgeting is the primary financial tool used by organizations to tie future
resource use to work performed. While strategic management focuses on patients’ needs, wants,
and expectations, a primary input is, nonetheless, financial information that ties resources
consumed to products and services.” According to Ross, Thomas (2005)
Mentioned by Robbins and Coulter (2012) Strategic Management is what managers do to
develop the organization’s strategies. It’s an important task involving all the basic management
functions such as planning, organizing, leading and controlling. There are three reasons why
strategic management is important. The most significant one is that it can make a difference in
how well an organization performs. Research has found a generally positive relationship between
strategic planning and performance. Another reason it’s important has to do with the fact that
managers in organizations of all types and sizes face continually changing situations. They cope
with this uncertainty by using the strategic management process to examine relevant factors and
decide what actions to take. Finally, strategic management is important because organizations are
complex and diverse. Each part needs to work together toward achieving the organization’s
goals; strategic management helps to do this.
Based on David (2013), Strategic management can be defined as the art and science of
formulating, implementing, and evaluating cross-functional decisions that enable an organization
to achieve its objectives. As this definition implies, strategic management focuses on integrating
management, marketing, finance/accounting, production/operations, research and development,
and information systems to achieve organizational success. Sometimes the term strategic
management is used to refer strategy formulation, implementation, and evaluation. The purpose
of strategic management is to exploit and create new and different opportunities for tomorrow.
To sum up, strategic management is about analyzing the organizational internal and
competitive environment, ensuring that all the planned strategies are carried out accordingly
throughout the organization.
2.3 Strategic Management
2.3.1
Benefits of Strategic Management
David (2013) claimed that strategic management allows an organization to be more
proactive than reactive in shaping its own future; it allows an organization to initiate and
influence activities and thus to exert control over its own destiny.
2.3.2
Key Terms in Strategic Management
As stated by David (2013), there are nine key terms:
•
Competitive Advantage
When a firm can do something that rival firms cannot do, or owns something that rival firms
desire, that can represent a competitive advantage.
•
Strategists
Strategists are the individuals who are most responsible for the success or failure of an
organization. Strategists have various job titles, such as chief executive officer, president, owner,
chair of the board, executive director, chancellor, dean, or entrepreneur. Strategists help an
organization gather, analyze, and organize information. They track industry and competitive
trends, develop forecasting models and scenario analyses, evaluate corporate and divisional
performance spot emerging opportunities, identify business threats, and develop creative action
plans.
•
Vision and Mission Statements
Developing a vision statement is often considered the first step in strategic planning, preceding
even development of a mission statement. Developing a mission statement compels strategists to
think about the nature and scope of present operations and to assess the potential attractiveness
of future markets and activities.
•
External Opportunities and Threats
This refers to the economic, social, cultural, demographic, environmental, political, legal,
governmental, technological, and competitive trends and events that could significantly benefit
or harm an organization in the future.
•
Internal Strengths and Weaknesses
An organization’s controllable activities that is performed especially well or poorly. They arise
in the management, marketing, finance/accounting, production/operations, research and
development, and management information systems activities of a business. Organizations strive
to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses.
•
Long-Term Objectives
Objectives are essential for organizational success because they state direction; aid in evaluation;
create synergy; reveal priorities; focus coordination; and provide a basis for effective planning,
organizing, motivating, and controlling activities.
•
Strategies
Strategies are the means by which long-term objectives will be achieved. Business strategies may
include geographic expansion, diversification, acquisition, product development, market
penetration, retrenchment, divestiture, liquidation, and joint ventures.
•
Annual Objectives
Annual objectives are short-term milestones that organizations must achieve to reach long-term
objectives. Annual objectives should be measurable, quantitative, challenging, realistic,
consistent, and prioritized.
•
Policies
Policies include guidelines, rules, and procedures established to support efforts to achieve stated
objectives. Policies are guides to decision making and address repetitive or recurring situations.
2.3.3
Levels of Strategy
Strategy making is not just a task for top executives. Middle and lower level managers also must
be involved in the strategic planning process to the extent possible. In large firms, there are
actually four levels of strategies: corporate, divisional, functional, and operational. However, in
small firms, there are actually three levels of strategies: company, functional and operational. It
is important that all managers at all levels participate and understand the firm’s strategic plan to
help ensure coordination, facilitation and commitment while avoiding inconsistency, inefficiency
and miscommunication.
Bank Pundi is considered to be a small firm, and for this research the data was obtained through
the company and functional level as they have more data and information of the overall
performance and condition of the company.
2.3.4
Types of Strategy
Based on Thompson JR, Strickland, and Gamble (2008), strategies to compete in rapidly
growing market must include:
1. Driving down costs per unit so as enable price reductions that attract doves of new
customers. Charging a lower price always has strong appeal in markets where customers
are price-sensitive and lower prices can help push up buyers demand by drawing new
customers to the marketplace.
2. Pursuing rapid product innovation, both to set a company’s product-offering part from
rivals and to incorporate attributes that appeal to growing numbers of customer.
3. Gaining access to additional distributions channels and sales outlets. Pursuing wider
distribution access so as to reach more potential buyers is a particularly good strategic
approach for realizing above average sales gains. But usually this requires a company to
be a first mover in positioning itself in new distribution channels and forcing rival into
playing catch up.
4. Expanding the company’s geographic coverage. Expanding into new areas, either
domestic or foreign, where the company does not have a market presence can also be an
effective way to reach more potential buyers.
5. Expanding the product line to add more models that appeal to a wide range of buyers.
Offering buyers a wider selection can be an effective way to draw new customers in
number sufficient to realize above average sales gains.
In accordance with David (2013), these are the 4 types of corporate strategies:
1. Integration Strategies:
•
Forward Integration: Involves gaining ownership or increased control over distributors or
retailers. Increasing numbers of manufacturers today are pursuing a forward integration
strategy by establishing websites to directly sell products to consumers.
•
Backward Integration: Both manufacturers and retailers purchase needed materials from
suppliers. This is a strategy of seeking ownership or increased control of a firm’s
suppliers. This strategy can be especially appropriate when a firm’s current suppliers are
unreliable, too costly, or cannot meet the firm’s needs.
•
Horizontal Integration: A strategy of seeking ownership of or increased control over a
firm’s competitors. Mergers, acquisitions, and takeovers among competitors allow for
increased economics of scale and enhanced transfer of resources and competencies.
2. Intensive Strategies
•
Market Penetration: This strategy seeks to increase market share for present products or
services in present markets through greater marketing efforts. This strategy is widely
used alone and in combination with other strategies. Market penetration includes
increasing the number of salespersons, increasing advertising expenditures, offering
extensive sales promotion items, or increasing publicity efforts.
•
Market Development: Involves introducing present products or services into new
geographic areas.
•
Product Development: A strategy that seeks increased sales by improving or modifying
present product or services. Product development usually entails large research and
development expenditures.
3. Diversification Strategies
•
Related Diversification: Guidelines for an effective strategy are as follows:
1. When an organization competes in a no-growth or a slow-growth industry
2. When adding new, but related, products would significantly enhance the sales of
current products.
3. When new, but related, products could be offered at highly competitive prices.
4. When new, but related, products have seasonal sales levels that counterbalance an
organization’s existing peaks and valleys.
5. When an organization’s products are currently in the declining stage of the
product’s life cycle.
6. When an organization has a strong management team.
•
Unrelated Diversification: This strategy favors capitalizing on a portfolio of businesses
that are capable of delivering excellent financial performance in their respective
industries, rather than striving to capitalize on value chain strategic fits among the
businesses. Firms that employ unrelated diversification continually search across
different industries for companies that can be acquired for a deal and yet have potential to
provide a high return on investment.
4. Defensive Strategies
•
Retrenchment: When an organization regroups through cost and asset reduction to
reverse declining sales and profits. During retrenchment, strategists work with limited
resources and face pressure from shareholders, employees, and the media. Retrenchment
can entail selling off land and buildings to raise needed cash, pruning product lines,
closing marginal businesses, closing obsolete factories, automating processes, reducing
the number of employees, and instituting expense control system.
•
Divestiture: Selling a division or part of an organization. Divestiture is often used to raise
capital for further strategic acquisitions or investments. This can be a part of an overall
retrenchment strategy to rid an organization of businesses that are unprofitable, that
require too much capital, or that do not fit well with the firm’s other activities.
•
Liquidation: Selling all of a company’s assets, in parts, for their tangible worth. This is
recognition of defeat and consequently can be an emotionally difficult strategy.
2.3.5
Comprehensive Strategic-Management Model
Figure 0.1 Strategic Management Model
2.3.6
External Assessment
David (2013) claimed that by doing external audit, the company can develop a finite list of
opportunities that could benefit a firm and threats that should be avoided. This is aimed to
identify key variables that offer actionable responses. To perform an external audit, accompany
first must gather competitive intelligence and information about economic, social, cultural,
demographic, environmental, political, governmental, legal, and technological trends.
Subsequently, it should be assimilated and evaluated. Lastly, it should be communicated and
distributed widely in the organization.
2.3.7
Internal Assessment
Mentioned by David (2013), analyzing internal strengths/weaknesses, coupled with
external opportunities/threats and a clear statement of mission, provide the basis for establishing
objectives and strategies. Objectives and strategies are establishes with the intention of
capitalizing upon internal strengths and overcoming weaknesses. The internal audit requires
gathering
and
assimilating
information
about
the
firm’s
management,
marketing,
finance/accounting, production/operations, research and development, and management
information systems operations. The process of performing an internal audit provides more
opportunity for participants to understand how their jobs, departments, and divisions fit into the
whole organization.
2.3.8
Porter’s Five Forces Model
Based on Porter, as cited by David (2013), Porter’s Five Forces Model about competitive
analysis is an approach to define strategies in many industries. The intensity among rivalries
varies from one rival to another. These are the Five Forces:
•
Suppliers Power: This is driven by the number of suppliers of each key input, the
uniqueness of their product and 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 supplier’s help, the more powerful your suppliers are.
•
Buyer Power: This is driven by the number of buyers, the importance of each individual
buyer to your business, the cost to the to switch from your products and services to those
of someone else’s and so on. If you deal with few, powerful buyers, then they are often
able to dictate terms on you.
•
Competitive Rivalry: What is important here is the number and capability of your
competitors. If you have many competitors, and the offer equally attractive products and
services, then you’ll most likely have little power in the situation, because suppliers and
buyers will go elsewhere if they don’t get a good deal from you. On the other hand, if no
one else can do what you do, then you can have often has tremendous strength.
•
Threat of substitution: This is affected by the ability of your customers to find a different
way to do 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 it weakens your
power.
•
Threat of New Entry: Power is also affected by the ability of people to enter your
market. If it costs little time and money to enter your market and compete effectively, if
there is few economies scale on the place, or if you have little protection for your keys
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.
2.3.9
Strategy-Formulation
David (2013) stated that the strategy-formulation techniques could be integrated into a
three-stage decision making framework. The tools presented in the framework are applicable to
all sizes and types of organizations and can help strategists identify, evaluate, and select
strategies.
Figure 0.2 Strategy Formulation
•
Stage 1: The Input Stage
The input tools require strategists to quantify subjectivity during early stages of the strategyformulation process. This consists of External Factor Analysis (EFE) Matrix, Internal Factor
Analysis (IFE) Matrix, and Competitive Profile Matrix (CPM).
EFE: Allows strategists to summarize and evaluate economic, social, cultural, demographic,
environmental, political, governmental, legal, technological, and competitive information.
Regardless of the number of key opportunities and threats included in an EFE matrix, the highest
possible total weighted score for an organization is 4.0 and the lowest possible to weighted score
is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0 indicates that an
organization is responding to in an outstanding way to existing opportunities and threats in its
industry.
IFE: This strategy-formulation tool summarizes and evaluates the major strengths and
weaknesses in the functional areas of a business, and it also provides a basis for identifying and
evaluating relationships among those areas. Intuitive judgments are required in developing and
IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is
an all-powerful technique.
CPM: Identifies a firm’s major competitors and its particular strengths and weaknesses in
relation to a sample firm’s strategic position. The critical success factors in a CPM are not
grouped into opportunities and threats as they are in an EFE. In a CPM, the ratings and total
weighted scores for rival firms can be compared to the sample firm. This comparative analysis
provides important internal strategic information. Factors often included in this analysis include
breadth of product line, effectiveness of sales distribution, proprietary or patent advantages,
location of facilities, production capacity, and efficiency, experience, union relations,
technological advantages, and e-commerce expertise.
•
Stage 2: The Matching Stage
These tools rely upon information derived from the input stage to match external opportunities
and threats with internal strengths and weaknesses. This consists of Strengths-WeaknessesOpportunities-Threats (SWOT) Matrix, Strategic Position and Action Evaluation (SPACE)
Matrix, Boston Consulting Group (BCG) Matrix, Internal-External (IE) Matrix, and the Grand
Strategy Matrix.
The tools that will be used are:
SWOT
SWOT Matrix is an important tool that helps develop four types of strategies: SO (StrengthsOpportunities) strategies, WO (Weaknesses-Opportunities) strategies, ST (Strengths-Threats)
strategies, and WT (Weaknesses-Threats) strategies.
•
SO strategies use a firm’s internal strengths to take advantage of external
opportunities. All managers would like their organizations to be in a position in which
internal strengths can be used to take advantage of external trends and events. When a
firm faces major weaknesses, it will strive to overcome them and make them strengths.
When an organization faces major threats, it will seek to avoid them to concentrate on
opportunities.
•
WO strategies aim at improving internal weaknesses by taking advantage of external
opportunities. Sometimes key external opportunities exist, but a firm has internal
weaknesses that prevent it from exploiting those opportunities.
•
ST strategies use a firm’s strengths to avoid or reduce the impact of external threats.
This does not mean that a strong organization should always meet threats in the external
environment head-on.
•
WT strategies are defensive tactics directed at reducing internal weakness and
avoiding external threats. An organization faced with numerous external threats and
internal weaknesses may indeed be in a precarious position. Such a firm may have to
fight for its survival, merge, retrench, declare bankruptcy, or choose liquidation.
IE
IE Matrix is similar to the BCG Matrix in that both tools involve plotting organization divisions
in a schematic diagram; this is why they are both called “portfolio matrices.”
The
size
of
each circle represents the percentage sales contribution of each division, and pie slices reveal the
percentage profit contribution of each division in both the BCG and IE matrix. The IE matrix
requires more information about the divisions than the BCG Matrix.
Grand Matrix
Grand Matrix Strategy is a tool for formulating alternative strategies. This matrix is based on two
evaluative dimensions: competitive position and market (industry) growth. Any industry whose
annual growth in sales exceeds 5 percent could be considered to have rapid growth
•
Stage 3: The Decision Stage
The tool used will be the Quantitative Strategic Planning Matrix (QSPM). This technique
objectively indicates which alternative strategies are best.
QSPM
There is only one analytical technique in the literature designed to determine the relative
attractiveness of feasible alternative actions. This technique objectively indicates which
alternative strategies are the best. QSPM uses input from Stage 1 analyses and matching results
from Stage 2 analyses to decide objectively among alternative strategies. QSPM is a tool that
allows strategists to evaluate alternative strategies objectively, based on previously identified
external and internal critical success factors. QSPM determines the relative attractiveness of
various strategies based on the extent to which key external and internal critical success factors
are capitalized upon or improved. The relative attractiveness of each strategy within a set of
alternatives is computed by determining the cumulative impact of each external and internal
critical success factor.
2.4 Theoretical Framework
Bank Pundi
Strategy Analysis
Internal Analysis
External Analysis
Strengths and Weakness
IFE Matrix
Opportunities and threats
CPM
SWOT Matrix
EFE Matrix
IE Matrix
Grand Strategy Matrix
QSPM
Alternative Business Strategy
Figure 0.3 Theoretical Framework