The development strategy of power company no.2 up to 2015 and orientation to 2020

GRIGGS UNIVERSITY GLOBAL ADVANCED MASTER OF BUSINESS ADMINISTRATION PROGRAM CAPSTONE PROJECT REPORT THE DEVELOPMENT STRATEGY OF POWER COMPANY No.2 UP TO 2015 AND ORIENTATION TO 2020

GRIGGS UNIVERSITY GLOBAL ADVANCED MASTER OF BUSINESS ADMINISTRATION PROGRAM

CAPSTONE PROJECT REPORT

THE DEVELOPMENT STRATEGY OF POWER COMPANY No.2 UP TO 2015

AND ORIENTATION TO 2020

Group No: 2 Student’s name:

NGUYEN THANH DUY TRAN HUU MINH

NGUYEN ĐAC THANG THAI PHONG LINH

Class: GeMBA01.E04

AUTHORS

NGUYEN THANH DUY TRAN HUU MINH NGUYEN DAC THANG THAI PHONG LINH

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TABLE OF CONTENTS

CHAPTER I: THEORY AND KNOWLEDGE REVIEW

1.1.2 Requirements of planning and implementing strategies 8

1.2 The research methodology and strategic tools 16

1.2.2.2 Analyzing factors out of value chain 24

1.2.3.1 External Factor Evaluation Matrix – (EFE Matrix) 26 1.2.3.2 Internal Factor Evaluation matrix – (IFE Matrix) 27

1.2.3.5 The Quantitative Strategic Planning Matrix (QSPM) 30

CHAPTER II: PC2’S CURRENT SITUATION ANALYSIS-

THE EXTERNAL AND INTERNAL ENVIRONMENTAL

2.2.4 Analyzing the results of PC2’s production and business

2.2.4.2 Analyzing the results of PC2’s production and core business

2.2.4.3 Analyzing Public Telecom services- non-core business line 49

2.2.4.4 Comparing some key factors between PC2 and PC1, PC3 53

CHAPTER III: BUILDING THE STRATEGIES AND SOLUTIONS

3.1 Orientation of Vietnam government about the development of

3.4.1 Forecasting work in the period 2010- 2015 and orientation to 2020 89

3.4.1.2 Forecasting revenue and average selling price 92

3.4.1.3 Forecasting electricity losses 94 3.4.1.4 Limitations of the forecast methods using statistical tools 96

3.4.2 Some point of views on restructuring of EVN 97

3.7.3 Planning implement and investment capacity the strategies of PC2 128

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LIST OF SYMBOLS, ABBREVIATIONS

- ADB: Asian Development Bank

- AFD: Agence Française de Développement

- APEC: Ascia-Pacific Economic Cooperation

- ATM: Automated Teller Machine (cash machine)

- ASEAN: The Association of Southeast Asian Nations

- CMIS: Customer Management Information System

- IT: Information and Technology

- EVN: Electricity of Vietnam

- FDI: Foreign Direct Investment

- FMIS: Financial Management Information System

- GDP: Gross Domestic Product

- GENCO: Generation Company

- GNP: Gross National Product

- JBIC: Japan Bank for International Cooperation

- JICA Japan International Cooperation Agency

- LAN: Local Area Network

- ODA: Official Development Assistance

- PC2: Power Company number 2

- ROA: Return on Assets

- ROE: Return on Equity

- SADA: Supervisory Control and Data Acquisition

- SMS: Short Message Service

- SRPC: South Regional Power Company

- SWOT: Strengths- Weaknesses- Opportunities- Threats

- VND: Vietnam Dong (Vietnamese currency)

- WAN: Wide Area Network

- WB: The World Bank

- WTO: The World Trade Organization

LIST OF APPENDICES

Appendix 01: Calculation of PC2’s financial ratios in

Appendix 02: Capital contribution of PC2 to the join stock 137

Corporations Appendix 03: Electricity supply situation of PC2’s provinces/city 138

in 2008

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LIST OF FIGURES AND GRAPHS

Figure 1.4 Model SWOT Matrix combined to formulate strategy 30

Figure 2.1 Map of EVN’s geographical management 34

Figure 2.4 Map of PC2’s geographical management 39

Figure 2.6 Line Chart of the distribution grid growth of PC2

Figure 3.1 Line Chart of the sales electricity of PC2 in the period

Figure 3.2 Chart of PC2’s sales electricity forecast

Figure 3.3 Line Chart of the revenue of PC2 in the period

Figure 3.4 Chart of PC2’s revenue forecast

Figure 3.5 Line Chart of PC2’s electricity losses in the period

2000-2009 and trend equation on chart 95 Figure 3.6 Chart of the electricity losses forecast of PC2

Figure 3.7 SWOT Matrix combined to building strategies 107

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LIST OF TABLES

Table 2.1 PC2’s production and business activities

Table 2.9 PC2’s power grid fault performance 64

Table 2.11 Layout employees of PC2 in the period 2004-2008 66 Table 2.12 Comparison of labor productivity between PC2

with other country's electricity sector 67 Table 2.13 Customers of PC2 in the period 2000-2009 69 Table 2.14 Electric production of PC2 in the period 2000-2009 70 Table 2.15 Sales electricity of PC2 in the period 2000-2009 71 Table 2.16 Sales electricity ratio of PC2 in the period 2000-2009 72 Table 2.17 Electricity losses of PC2 in the period 2000-2009 74 Table 2.18 Balance sheet of PC2 in 2006-2007-2008 76 Table 2.19 Report of PC2’s business results in

2006- 2007- 2008 76 Table 2.20: Financial analysis of PC2 in 2006-2007-2008 77

Table 3.1 Sales electricity of PC2 in the period 1998-2009 89 Table 3.2 Forecasting sales electricity of PC2 in the period

Table 3.8 QSPM Matrix combined Strategy S-O continue 110

Table 3.10 QSPM Matrix combined Strategy W-O continue 113

Table 3.12 QSPM Matrix combined Strategy W-T continue 116 Table 3.13 Planning investment capacity to implement

Table 3.14 Roadmap implementation strategies of PC2 129

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PREFACE

A brief introduction about the role of Vietnamese power sector

The industry sector always plays a leading role in the economy of developed and developing countries, especially in the power sector It is well- known that electricity plays a significant role in the development of economic sectors It is necessary not only for the production of any factory, but also for the activities of the society It can help to improve living standard, gain many benefits for human, and make them great

in front of nature

EVN has innovated the management and administration activities since shifting

to an economic corporation model It has strongly focused on the development of power sources and grids to fulfill the needs of electricity for socioeconomic development Concurrently, it has also diversified other business activities The administrative mechanism has also been strongly decentralized and oriented the activities of the subsidiary companies through the EVN ownership representatives to perform the key indicators: investment targets and sales energy At once, EVN has called for investment without any effects on the activities of the subsidiary companies

The decentralized mechanisms has encouraged the autonomy and responsibility and promoted the full potential of the subsidiary units As a result, EVN has ensured to maintain at a high growth rate of 14-15% per year and supply sufficient electricity for the production and vital needs of inhabitants

Requirements of the government are restructuring the electricity industry EVN has developed and submitted to the Prime Minister in the quarter III/2009 "Project to establish Electricity Distribution Corporations in the model of parent – subsidiary companies According to the plan, the Power Companies No 1, 2, 3 will be change to the Regional Power Corporations under Electricity of Vietnam Group

Requirements of customers and society is increasing electricity quality, continuous and safety electricity supply, electricity cut-off, as well as improving customer service that is customers to be served at anytime, anywhere

Requirement for the electricity industry is to execute step-by- step market-based mechanism; electricity price is attractive to investors of all economic sectors in which state enterprises continue to play the leading role

Electricity price must be adjusted to the market-based mechanism set by the Ministry of Industry and Trade However, at the present, the electricity sector in general and the Power Companies No.2 in particular have played two roles of not only business enterprise but also a service unit by doing price subsidy for households in rural, mountainous, remote area, and deep poor households

Due to the speedy changes of science, technology and management requirements for company, the rapid changes of information technology in the flat world, the application of information technology management and customer service must be served better by adding values, PC 2 needs to formulate the strategy to meet

all said above things

1.2 The necessity and purposes of the capstone project

In the above context, we propose this project “The development strategy of Power Company No.2 up to 2015 and orientation to 2020” This is a necessary subject and urgent matter for all Power Distribution Companies in general and the Power Company No 2 in particular This is also requirements of the whole society and especially to the leader board of the Power Company No.2 for following reasons:

- The Company needs to have the development strategy in order to prepare electricity industry restructuring and to be transformed to a new model business – the corporation upgrading This new form will have a larger scale, more advanced technology and approaches to modern business management model in the world By being like that, the new one can exploit most from competitive advantages of the regional corporations; improve possible operational capabilities, efficiency and competitiveness in the market-based mechanism It can undertake the key role as the backbone of the national economy The corporation can have enough capabilities to govern domestic sectors, domestic market in terms of international economic integration and to contribute to the Vietnam integration in global economy effectively

- The development strategy is top priority task and demands of continuous innovation of the company To avoid from failure, it is required for the enterprise to innovate continuously due to non-stop change of the society, continuous improvement

of technology, people whom working in the business are constantly changing Under the circumstances, it is impossible for a company to fix its strategy for a long time

- Technical progress and people's living standard improvement have created new services If a company does move forward, they will be obsolete and be out of the business Due to these reasons, a company needs to innovate and to have strategy to cope with that For any changing reasons such as business, technology, products and services, manufacturing process or production management, marketing plan, a company always need strategic management process

- Formulating the business development strategic is a need for international economic integration For companies, the internationalization of business is not impossible however; a company must have a strategy to do this activity We are conducting participation into the World Trade Organization That means a company is

facing a tougher competitive situation Foreign goods will penetrate the market with bigger amount Domestic market and international ones will integrate as one unit Market competition will be tougher Enterprise with having no strategy will face problems causing by these reasons

- In recent years, theoretical and practical management changes are significant Strategic management has been receiving special attention from theorists and managers Indeed, “the process of internationalization is strongly going on all over the world, revolutionary scientific technology is occurring with rushing speed, the rapid changes of business environment are happening” all of these thing create opportunities and challenges for enterprises Facing to this situation, the enterprise must set up its business strategy and its strategic management has to reach the goals of the enterprise A company is required to pay larger attention to shareholders and to

link short-term developments in the long-term perspective”

For all above reason, the capstone project “THE DEVELOPMENT STRATEGY OF POWER COMPANY No 2 UP TO 2015 AND ORIENTATION TO 2020” is very practical and meaningful for management board of Power Company No.2 in order to adapt with rapid changes of environment and meet the requirements

of the Government, the society and customers

2 The research objectives

2.1 The research scope:

The researches will mainly focus on all related aspects to formulate development strategy for the Power Company 2; and research on prospects of restructuring direction of EVN; and analyze how EVN’s will strategy affect to the business development strategy of the Power Company No 2

2.2 The research objectives:

+ Formulating a development strategy for the Power Company No.2 up to 2015

in orientation of 2020 in order to form thinking, strategic vision that helps the company with a clear purpose, directions, desired results and creative action plan

+ Helping the company achieve the goals effectively and sustainably through the ability to seize opportunities and risk limit, better utilization of company resources

+ Helping the company to create and maintain competitive advantages to better adapt to market demand and target customers in order to hold the position and maximize profits in the long term firmly

3 The research methodology

This research has conducted in the following steps

- Corporate Finance, Financial Accounting,

- Decision Science & Statistics for Managers,

- Marketing Management

3.1 Step 1: Where we are now

- Survey to collect data in the present and the past within recently 5-10 years

to serve the analysis and situation assessment of the company's financial targets and PC2 current strategy implementation

- Conducting environmental analysis (SWOT): analysis strengths, weaknesses, opportunities and threats for enterprises to build and analyze SWOT matrix

3.2 Step 2: Where we want to be

Formulating and selecting development strategy

- Select and identify strategic objectives

- Set objectives, ROA, ROE ratios

- Identify vision, mission

- Analysis resource, possibility, resource of the company

- The prediction: use business statistics methods to predict the commercial electricity output, electricity loss, electricity cut-off time for coming 10 years and developing directions in future

- Establishing development strategies of the company based on using of SWOT matrix analysis

- Selecting the strategies for PC2 based on the QSPM matrix analysis

3.3 Step 3: How to get there How to execute the strategies

- Building the corporate level strategies and functional level strategies for PC2

- Building specific steps to implement solutions for corporate level strategic and functional level strategies

4 Structures

The capstone project has the preface, introduction, general context, the necessity and significance of topics, the research objectives, the research methodology and three chapters in the following structure:

Chapter I: Theory and Knowledge Review - Strategic management process Overview

Chapter II: PC2’s Current Situation Analysis - The external and

internal environmental analysis - SWOT matrix analysis

Chapter III: Building the Strategies and solutions for PC2

Recommendations and Conclusions

CHAPTER I THEORY AND KNOWLEDGE REVIEW – STRATEGIC MANAGEMENT PROCESS OVERVIEW

1.1 Strategic management

1.1.1 Concepts

There are many different concepts of strategic management These concepts can

be summarized in three common approaches, as follows:

 Environment approach :

"Strategic management is a decision-making process to link internal capacity of the organization with opportunities and threats of the external environment “ This approach helps the company to formulate the strategy in the environment direction to exploit opportunities and to avoid risk

 Objectives and solution approach :

"Strategic Management is part of management decisions and actions to define long-term achievement of an enterprise” This approach allows managers to define more precisely the objectives of the organization as well as to use effectively the resources of the enterprise

 Action Approach

"Strategic Management is A conduction of the current and future environmental review, creating the organization goals, implementing decision making, controlling the implementing process for achieving the goals in the current and future environment”

From the above approaches, the concepts are summarized as follows:

"Strategic management is the process of studying the current and future environment; planning the organization objectives; formulating, implementing and supervising the implementation of the decision; in order to reach the target in the current and future environment"

Furthermore, strategy is also a harmonious combination from three factors:

- Ripeness: selection of the right point

- Reality: ability to execute the strategy

- Resources: Potential exploitation

1.1.2 Requirements of planning and implementing strategies

 First: Business strategy is to achieve the goal of increasing the enterprise force and gain competitive advantage Therefore, strategy formulation aims fully exploiting the relatively competitive advantages of the company and the company strength not using too much resource to overcome weaknesses

 Second: business strategy is to ensure business safety for the company Business activities have their inherent risky elements that a company often encounters Therefore, business strategies must have a safety zone where risks can happen in lowest possibility level

 Third: Business strategy is to determine the business scope, objectives and basic conditions to achieve objectives Determining the scope of business strategy ensures overcoming over deployment resources, or avoiding under deployment of resources Objectives must be clear and consistent with the specific conditions of the company Objectives should point out the most basic, critical objectives Together with objectives, there must be a system of policies, measures and material and technical conditions, labor as the premise for the objective implementation

 Fourth: Business strategy must predict business environment in the future The more accurate predication is, the appropriate business strategy is Therefore, there should have certain amount of information and knowledge and right methods of thinking to get realistic and smart view on prospective scope that enterprise can confront in the future

 Fifth: Business strategy should have a back-up plan Business strategy is to implement in the future that is an unknown As formulating business strategy, a company should think of the worst scenario that a company might encounter If this happening in reality, which strategy option should be replaced

 Sixth: Business strategy should be in aright combination of ripeness with opportunities If business strategy is not ripe enough, it will certainly get failure However, there is a paradox that some business strategies get failure due to too ripeness happening The reasons are due to the perfectionism in strategy formulation,

taking too much time to deal with details in expectation of having a perfect strategy This will lead to a situation when strategy formulation is completed It will be out of date comparing with environment changes

1.1.3 The role of strategic management

It is hard to find a direct relationship of strategic management with a company profit increase as there are many and complex factors in environment However, it cannot deny the truth that there is an indirect contribution of strategic management to the profitability through the exploitation of opportunities and gaining advantage in competition

 The strategic management process will help organizations seeing a clear view

of purpose and direction It makes manager to consider and to determine which direction of the organization goes and when it reaches a certain position

 Strategic management process helps manager focus on opportunities and risks

in the future when company is always facing environmental changing conditions It helps managers to take advantage of opportunities and minimize risk

 Thanks to the strategic management process, a company will link decisions to relevant environmental conditions, attempting to take an active position or passive attack method when they want to respond to changes in the environment and to control situational progress

 Most researches shows that companies applying strategic management will achieve better results than ones they got earlier and than other companies that do not use strategic management

However, strategic management has its disadvantages:

 Establishing strategic management process takes time and effort

 Strategic management often goes into operation wrongly, inflexibly when they are written in official document

 Error range in forecasting long-term environment can sometimes be very large

 Some companies seem still in planning stages and pay a too little attention to implementation issues This happening leaves managers in doubts of the strategic management process

As above-mentioned disadvantages make a number of companies do not applying strategic management, they can still overcome the disadvantages if they know to apply strategic management properly Obviously, the advantages of strategic management are larger than its disadvantages

1.1.4 Stages of strategic management

1.1.4.1 Strategy formulation: the process of setting up business mission,

conducting analysis to identify internal strengths and weaknesses, external opportunities and risks,, setting out long-term objectives, building and selecting back-

up strategies There are three basic activities in this stage:

 Conduct research: this action involves collecting and processing information about market and industry of the company

 Intuition awareness: there are many strategy management techniques for manager to merge intuition thinking with analysis in making and selecting feasible strategic alternatives

 Decision making: As an organization does not have infinite resources, so that manager must make decisions regarding the choices of strategic alternatives that will benefit the company most Strategic decisions have long-term impact that may be better or worse for an organization Strategists need to have good vision to understand the decisions formation branching

1.1.4.2 Strategy implementation: It is the action stage of strategic management

action These basic activities in this stage are to set short-term goals, to make policy and to allocate resources The latest action is often considered one of the most difficult

in the strategic management process The roles of managers and staff in this stage are huge To achieve success, all departments and departments have to answer the question: "What will we have to do to fulfill our part in the strategy of the organization?" and "How will we do the job best?”

1.1.4.3 Control and assessment of strategies: this stage is necessary because the

present results do not secure success in the future The organizations having satisfaction mental will pay for their weaknesses The main activities of this stage are: (1) review the current strategic basic factors, (2) measure the achievement results and (3) implementation of adjustment

1.1.5 Levels of strategic management

1.1.5.1 Company level Strategy: they clearly define and outline the company

objectives and goals They identify business activities that the companies pursue, and create essential policies and plans to achieve the company objectives Strategy at company level is to determine business activities in which companies compete and allocate resources among those activities

1.1.5.2 Business level Strategy: they determine the selection of specific products

or a specific market for in-house business activities of the company The strategies determine how the company will compete with competitors as the company position and their competitor ones are established in the market Strategies at business level determine how each business unit will attempt to complete its goal in order to contribute to the company goal accomplishing

1.1.5.3 Function level strategy: they focus on supporting deployment the

company's strategies and on the operational areas and the business sectors

1.1.6 Mission and objectives definition

Defining mission and objectives is one of the first and very important tasks in strategic management It makes scientific basis for the analysis and selecting of strategy for the company Determining mission statement of the company is not only for newly established companies, but also for the company with long history development Mission may change as the environment changes

1.1.6.1 Mission: the company mission is a concept used to describe the purpose of

the company, the reason and meaning of the company birth and existence It is the company declaration towards society In fact, mission statement of the company will clear a very important issue "What purposes does the company business aim for?” In

Vietnam past time, the term "mission" is rarely used, however there has been some equivalent terms such as "principles, purposes" or "functions and tasks”

 The role of the mission statement: According to King and Cleland, the mission statement of the company is to achieve the following requirements:

1 Ensure the goal willingness and agreement within the company

2 Provide the basis to mobilize the company resources

3 Set a basis or standard for resources allocation in the company

4 Create a favorable business framework and environment

5 Be a central point for people agreeing with the goals and direction of the company

6 Create conditions to convert purposes of the organization into appropriate objectives

7 Create conditions to convert the goal into strategies and specific activities

 Mission statement content: The content of the mission statement often related to aspects such as products, markets, customers, technology and philosophy that the company pursuing Here are nine components of the vision:

1 Customer: Who is the consumer using products company?

2 Products or services: What are key products or services of the company?

3 Market: Where does the company to compete?

4 Technology: Is technology a priority concern of the company or not?

5 Company attention to survival, development issues and profitability Is the company tied to the economic goals or objectives?

6 Philosophy: What are fundamental beliefs, values, aspirations and priorities of the company's philosophy?

7 Company self-assessment: What are core competencies or competitive advantages of the company?

8 Public image concern: Is the public image concerns important to the company or not?

9 Concerns for employees: What does the company philosophy to the staff look like?

 Mission requirements

1 The mission statement scope should not be too broad or too narrow If it

is too large, it will become vague and does not create goals and motivation for company to grow forward If it is too narrow, it will hinder the company operational activities and lead to omit business opportunities that market will bring to Due to these reasons, the mission statement should have adequate scope to eliminate risk In addition to this, the mission should be large enough to set the conditions for the company’s creative growth

2 Mission content should be relatively clear to everyone in the company

to understand The mission content is represented in order to orient and to present perspective, attitude, creating motivation, image, melody, the philosophy that guide the company and do not show specific objectives Specific subjects will be considered when determining objectives of the organization in each period

3 A good mission statement should be constructed based on customer orientation, which means it must be built based on accurate forecasts of customer demand, then determined to use technology and products and services to production The mission statement must show the meaning and benefits of products and activities

of the company for their customers

4 There are times when companies have to review the mission statement Companies have to do that as when the business environment has a huge change, or when companies face failure in business, companies have no profits, or companies do not use these strengths or competitive advantage When these conditions happen, what are companies pursuing are no longer appropriate and they have to change themselves

to adapt new situation

1.1.6.2 Objectives: Our mission is the axis through the company development and

the long-term goals of the company Objectives are the specific content and means to implement the mission statement successfully of the company Determining right objectives is very important for the company

 Definition: The objective is the state, the milestone, the specific target that the company desires to achieve in a certain period

 Roles

1 A means to implement the company goals

2 Setting company specific objectives of in each stage enable manager to identify priorities for goals implementation and resources and resources allocation

3 Objectives act as standards for the implementation, basics for planning activities, organizing the implementation, checking and evaluating activities

4 Objectives properly set will attract shareholders (customers, shareholders, employees' organization )

of revenue for R&D

- Medium-term objective: they have the time length from 1 year to 3 years

- Long-term Goals: they are usually 5 years or longer They are tied up with strategic and large-scale decision such as profitability degree, productivity, competitive position, career development, internal relations, social responsibility, technology positioning

2 Objective nature type:

- Economic objectives: they can be profitability, revenue, market share, productivity, product quality, competitive position

- Social objectives: they can be employment resolution, charitable activities participation, environmental protection and living environment

- Political objectives: they can be good relations with local authorities, lobbying to change policies and regulations to benefit the company, approach to build

up good relations with other government agencies for having timely information, the opportunity to receive the orders of the government

- Function level objectives: they are referred to activities in each specific function such as production, finance and marketing

5 Growth rate decision

- Fast-growth rate: The growth rate is set at faster rate than the competitor ones or than the average growth of the industry

- Stable growth rate: The growth rate is set at average growth of the industry, or maintained a previous year growth rate

- Sustainable and stable growth rate: When the current market has unfavorable conditions and a company has previous high growth rate The growth rate targets for next year can be keep the same and should be fortified to achieve

- Declining objectives: the growth rate decreased to levels lower than the average growth rate of the whole industry, even scale down operation of the company, due to objective reasons such as global economic recession, high inflation, too tough competition or due to subjective reasons such as the company desires to strengthen growth in the past, enhancing efficiency

 The objectives requirements:

1 Specification degree: objectives must be related to specific issues, deadline and specific expected results

2 Flexibility degree: objectives must be flexible enough to adjust the environmental changes

3 Quantitative degree: objectives should be expressed as measurable indicators They will be used for monitoring strategy implementation

4 Feasibility degree: objectives must be feasible; otherwise, it will be time waste and even have negative effect

5 Consistency degree: objectives must be consistent with each other and accomplishing this goal does not obstruct other goals It is very difficult to ensure the objectives consistency In order to minimize objectives differences occurred, it is recommended to prioritize and to find tolerance way for them

6 Acceptance degree: right objectives are accepted by both implementation and affected people Managers and staffs are two key workforces to implement successful objectives

1.2 The research methodology and strategic tools

SWOT matrix analysis

Things that are bad now,

remedy, change or stop them

EXTERNAL Origin

facts/ factors of the

environment in which the

organization operates

Opportunities

Things that are good for the future, prioritize them, capture them, build on them

and optimize

Threats

Things that are bad for the future, put in plans to manage

them or counter them

Figure 1.1: SWOT general model

SWOT analysis is a planning tool used to understand the strengths, weaknesses, opportunities and threats related to a project or business It relates to the determination

of the target business or project and identifying the internal and external factors that support or hinder to achieve that goal SWOT is often used as part of a process of strategic planning

SWOT stands for Strengths, Weaknesses, Opportunities and Threats

1.2.1 Macro and micro environment analysis

Environment is the factors, forces, the institutions etc that locate outside the business that leader cannot control They affect to the business activities of enterprises Environmental factors have a huge impact because it affects the next process of strategic management Selected strategy need to be planned on the environmental

* The trend of the GDP and GNP: Data of annual GDP and GNP growth of will indicate growth of the economy and the growth rate of per capita income They allow company to predict the market size and market share of each sector of the enterprise

* Interest rates and trends of interest: they affect the trend of the savings consumption and investment therefore affects the business operation Interest rate increase will limit demand for loans to invest in expanding business operations, affecting the business profitability Interest rate increases also encourages people to deposit money in banks It will reduce consumption demand

* Balance of international payments: The economy problem can happen due

to the trade deficit They will change the economic environment for some extent in general

* The trend of exchange rates: The fluctuation of exchange rates change the business conditions in general, create the opportunities and threats for different businesses, particularly its work of balance import-export relations

* The trend of increase or decrease real income: affects directly to the scale and nature of the market in the future

* The level of inflation: inflation is too high to encourage saving and creating risk for the investment of enterprises, the purchasing power of society and declining as the economy stalled In contrast, too slow inflation has also made the economy stagnated Maintaining a moderate inflation rate to encourage investment in the economy, stimulate market growth

* Taxes and the tax system: The tax changes may create opportunities or risks for the enterprise because it makes the cost or revenue of the enterprise change

* Fluctuation of the stock market: changes the value of the shares, thus affecting the economy and create opportunities or risks to the financial activities of the enterprises

ii Political and legal factors

They include the system of point-of-view, direction and policies of the government, the current legal system, political trends, government diplomats, the domestic political evolutions in the region and the whole world For example, company must comply with the employment regulations, lending and leasing stipulation, safety rules, prices, ads, plant location, environmental protection etc Government authorities are monitoring, maintaining, and implementing laws that protect the country interests Government plays essential role in regulating the macro-economy through economic, finance and monetary policies, and its spending plans In relationship with company, the government plays roles not only as a controller, supporter, sponsor, regulator, restrictor, but also as an important customer for the

enterprise (in government spending) and finally, as providers of services to the enterprise such as providing macro information, other public services

iii Social factors

Including standards, values accepted and respected by a society or specific culture Changing socio-cultural factors is due to of long-term impact of other macro factors, so it often happens more slowly, with long-term and more subtle nature, and makes them sometimes difficult to be identified On the other hand, the scopes of the impact of socio-cultural factors are often very large, it determines how people live, work, produce, and consume products and services The socio-cultural aspects have strongly influenced the business environment such as the concept of morality, aesthetics, lifestyle, occupation, customs, habits, traditions, interests and priorities of the society, knowledge level and general education of society The socio-cultural factors are different from each country, and from different areas of the country

iv Environmental factors

Natural conditions, including geographic location, climate, natural landscapes, land, river and sea, mountains and forests, mineral resources, clean water and air In many cases, the natural conditions have become a very important factor to formulate the competitive advantages of products and services Today, with the environmental pollution caused by the people, business strategies of enterprises must meet the following requirements: 1 / prioritize the development of production and business activities or services to stubs good operation conditions and advantages of the natural environment on the basis of ensuring the maintenance, reconstruction, especially if you can contribute to strengthen further the natural conditions 2 / Have a sense of saving and efficient use of natural resources, gradually the use of resources cannot be recycled in nature to the use of artificial materials 3 / promoting research, technology development and products help protect the natural environment, living environment, minimize the effects of environmental pollution caused by activities of the enterprise

caused

v Technological factors

This is one of the most dynamic factors includes many opportunities and threats for the enterprises

The pressures and threats include the birth and explosion of new technologies: 1/ appearing and increasing competitive advantage of substitute products, threatening the traditional products of the current industry 2/ existing technology was outdated, requiring enterprises to technological innovation to enhance competitiveness 3/ facilitating favorably for new entrants and threatening to existing enterprise in the industry 4/ technology life cycle tends to shorten again, as increasing pressure to shorten depreciation duration than previous ones

In addition, opportunities may come as follows 1/ technology facilitates production for cheaper products, higher quality to increase competitiveness 2/ birth of new technology and the ability to transfer this new technology in other industries could create important opportunities to develop production and improve products in the industry 3/ the birth of new technologies can make products cheaper, better quality

and more features by which we can create new markets

1.2.1.2 Micro environment

It includes the industry elements, which are the external factors to the enterprise that determines nature and competitive level of that industry Michael Porter, a well-known professor about business strategy of Harvard Universities, proposed a model

of competitive pressure as

(figure 1.2):

Figure 1.2: Model 5 competitive pressures

i Competitors

Competitor is the one who shares the same customer target Direct competitors are rivals who satisfy customer needs in the same industry, same way Indirect competitors compete in different forms Competition intensity depends on the number

of competitors; growth of the industry; fixed investment costs; switching cost, product homogeneity or heterogeneity, industry level of diversification Manager should know:

* What do competitors want to reach?

* What are competitors doing and can do?

* Do competitors satisfy with the present results?

* How do competitors move and direct the business?

* What are their weaknesses?

* What helps competitors retaliate strongly and effectively?

ii Buyers

Buyers are the object that the company serves They can be viewed as part of the company Buyer’s loyalty is an advantage of the company The customer loyalty is created from buyer need satisfaction desire to do better Another issues related to buyer is their bargaining ability to the sellers The buyer has the advantage that can decrease profits by bargaining prices down or requiring higher quality and asking more services A high buyer bargaining power makes more difficulties to the enterprise Bargaining power signs:

* The buyer asks discount

* The buyer requests higher quality and service condition

* Causes increase buyer bargaining power

* More sellers, less buyers

* Products have not unique feature and are basic good

* The buyer has full information

* In case buyers have ability backward integration

Enterprises should list present and future buyers The information obtained from listing is the critical basis for planning, especially directly related to marketing planning The main variables to consider are the geographic, demographic,

psychological etc

iii Suppliers

Suppliers are organizations or individuals to ensure supply of essential elements for businesses to produce goods or services Change of suppliers affects greatly to the production and business activities of enterprises The provider may cause a pressure for the operation of the business Therefore, enterprises cannot ignore the research on suppliers in the process of environmental studies Conditions increase the pressure of supply:

* There are too few suppliers

* The inputs have high distinction and the differences with its own

characteristics

* The buying enterprise is not important to the supplier

* Supplier is capable of forward integration

When analyzing suppliers, there are three concern subjects:

* Materials and equipment suppliers: whose pressures are price increase, decrease of product quality or added- services

* Financial community: These units have a great affect to the ability ensuring business capital such as banks, finance companies, loan institutions In a certain moment, the majority of enterprises, including profitable enterprises, must have temporary loan from the financial community Enterprises should set out the questions:

- enterprise’s shares have been evaluated correctly – Is working capital of the enterprise strong? - The conditions of the loan debt are consistent with the objectives

of the business - The lender has the ability to prolong loan period and loan duration as needed

* Labor source: It is also a major factor in the competitive environment of the enterprise Ability to attract and retain talents is premise to ensure enterprise success The major conditions needing to be evaluated are training and professional qualifications of employees, relatively enterprise- the employer, attractive level in

terms of salary

iv Potential entrants

Potential entrants are the existing competitors who are not critical now, however will be able to compete in the future Potential entrant’s competitiveness is evaluated through the concept- entry barriers to prevent the accession to the business Entry barrier has a meaning that an enterprise needs spending a lot to enter in a new certain business The higher the initial cost is, the higher the barrier is and vice versa New competitors entering the business sector can be a cause to reduce the enterprise profitability due to the utilization of new production capacity with the desire to win

market share and resources needed

v Substitutes

Substitute goods are goods that can be used to satisfy the same needs, one in the place of another The buyer carries out an actual and conscious process of choice about them, which leads the buyer to prefer one to another Mostly new substitutes are the result of the explosion of technology Due to later appearance, having better utility and prices, substitutes cause other enterprise lost, greater expenses multiples often associated with potential entrants participation pressure Enterprises need to pay attention and to reserve resources to develop or apply new technologies

into their strategies

1.2.2 Internal Environment analysis

Internal analysis can permit us to find out the strong and week points of the company

1.2.2.1 Value chain analysis

Value chain is the activities associated with the business production process Analyzing the value chain permits a company to find out the fundamental strengths and weaknesses of an enterprise

i Support functions

1 Infrastructure: They are factories, equipment, tools that affect strongly

to business operations These main activities cannot function properly in inadequate infrastructures

2 Human Resource Management: The human resources activities such

as recruitment, training, training are important In fact, when the two rivals have same

capabilities in terms of finance, engineering and technology, the effective human resources management will increase the advantage of the business By training employees in multiple jobs, improving employee skills and maintaining good labor relations, managers can make businesses to respond more quickly to market when business environment changes

3 Technology management: Technologies are tied up with all valuable activities in an organization It affects all large-scale operations from product and process development to order receiving process and distribution process However, senior managers should consider technology investment as the source of risk as customer demand changing, competitor imitation and the technology changing itself

4 Purchasing and procurement control: purchasing and procurement activities refer to the input acquisition that is used in the value chain of the company According to statistics, the total input cost accounts to about 60% of turnover of most businesses Therefore, a small saving percentage of these costs can have a great impact

to the company profits

ii Main operations

1 Input activities: They are related to supply, input controls, pace, supplying time Failure to meet input requirements affects badly to the output

2 Production activities: they are related to processing; schedule implementation; capacity utilization, product quality control and assurance, machinery maintenance and fixing These factors are affecting business activities

3 Output activities: They are related to warehousing, transporting, packaging, storage handling activities and order coordination If company manage them well, these will create more value to company

4 Marketing and sales elements, including the advertising activity, promotions, sales, distribution, new products demand, price, information collection and guidance If these activities are good, they create more strength for enterprise

5 After sales service: this is the important factor in the economy market It

is one of the promotion tools to appeals to customers

1.2.2.2 Analyzing factors out of the value chain

i Financial operation

Financial conditions are generally considered as the best methods to evaluate the company competitive position They also are the most attractive conditions for investors In order to formulate the strategy, company needs to identify the financial strengths and weaknesses of the organization Payment ability, debts, working capital, profits, capital utilization, cash flow and common shares of the company can make a strategy more feasible Calculating and analysis of financial indicators are important tools to assess the company financial capacity Five critical financial indicators need analysis: 1/ Liquidity ratios 2/ Leverage ratios 3/ Activity ratios 4 / Profitability ratios 5 / Growth indicators

ii Organization cultures and leadership art

Managers have recognized the importance of organizational culture leading to the competitive advantage The organization cultures can be viewed as the complex constituted from values, beliefs, assumptions and symbols, which define how the company to operate The organizational cultures, which related to people, the treatment and behavior, are a key factor to use the human assets The organization cultures have a significant effect to the strategic objectives and policies It can support

or prevent the selected strategy implementation

Leadership art has an important influence to the formulation and evolution of organization cultures, and to all company strategy indications John Kotter - a great expert on leadership - viewed leadership as the capability to create change in large organizations through sharing the vision with a large number of individuals in the entire organization Values and beliefs of leaders often form the cultural organization

Organization cultures and leadership art are hard to be measured, analyzed and recognized, however, these things to exert a great importance to the organizational goal implementation

iii Organizational structure

An appropriate structure can facilitate the work to be done in quick, consistent and seamless from managers to employees It also facilitates the information systems

and its internal control system design

iv Research and Development (R&D)

The quality of R&D efforts can help an enterprise keep the leading position in the industry or put behind the leading rivals in the industry in areas of new product development, product quality, cost control and manufacturing process Knowledge, experience and scientific capabilities of research and development function are not enough to ensure its healthy growing The R&D function has to monitor the environment conditions, the new technology changing information related to technology process, product and raw material The effective communication among R&D and other functions, especially the marketing plays an important role to ensure the organization success

v Information system

Information system links all business functions and provides the foundation for all management decisions In nowadays information explosion era, the information systems function becomes more and more important An effective information system will collect, encrypt, store and deliver the information requirements for answering strategic and organizational important questions It is the indispensable strategy part to monitor the environment changing, to recognize the competitive threats and to support for strategic implementation, evaluation and control

1.2.3 The strategic tools

The EFE matrix is the strategic tool used to evaluate firm existing strategies, EFE matrix can be defined as the strategic tool to evaluate external environment or macro environment of the firm include economic, social, technological, government, political, legal and competitive information

The EFE matrix consists of following attributes mentioned below

External Factors: Opportunities, Threats

Rating, Weight, Weighted Score, Total Weighted Score

The sum of all weighted score is equal to the total weighted score; final value of total weighted score should be between ranges 1.0 (low) to 4.0 (high) The average weighted score for EFE matrix is 2.5 any company total weighted score fall below 2.5

consider as weak The company total weighted score higher then 2.5 are considering as strong in position

Steps in developing the EFE matrix:

1 Identify a list of KEY external factors (critical success factors)

2 Assign a weight to each factor, ranging from 0 (not important) to 1.0 (very important)

3 Assign a 1-4 rating to each critical success factor to indicate how effectively the firm’s current strategies respond to the factor (1 = response is poor, 4 = response is extremely good)

4 Multiply each factor’s weight by its rating to determine a weighted score

5 Sum the weighted scores

1.2.3.2 Internal factor evaluation matrix – (IFE Matrix)

IFE matrix is one of the best strategic tools for internal audit of the company IFE

is use for internal audit of functional area of business such as finance, marketing, IT, operations, accounts and others depend upon the nature of business and its size

Internal Factors: Strengths, Weaknesses

Rating, Weight, Weighted Score, Total Weighted Score

The sum of all weighted score is equal to the total weighted score; final value of total weighted score should be between ranges 1.0 (low) to 4.0(high) The average weighted score for IFE matrix is 2.5 any company total weighted score fall below 2.5 consider as weak The company total weighted score higher then 2.5 are considering as strong in position

Steps to develop IFE Matrix

1 List key internal factors as identified in the internal audit process Use a total

of from ten to twenty internal factors, including both strengths and weaknesses List strengths first and then weaknesses Be as specific as possible, using percentages, ratios, and comparative numbers

2 Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm’s industry Regardless of whether a key factor

is an internal strength or weakness, factors considered to have the greatest effect on organizational performance should be assigned the highest weights The sum of all weights must equal 1.0

3 Assign a 1 to 4 rating to each factor to indicate whether that factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4) Note that strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating Ratings are thus company based, whereas the weights in Step 2 are industry based

4 Multiply each factor’s weight by its rating to determine a weighted score for each variable

5 Sum the weighted scores for each variable to determine the total weighted

score for the organization

1.2.3.3 Internal- External Matrix (IE Matrix)

The IE matrix is an important strategic tool The IE matrix used to plot the organization divisions in nine cell diagram, each cell has some meanings associated that suggest strategies

In summarize way it can be defined as the strategic management tool that is used to analyze the current position of the divisions and suggest the strategies for the future for the better results

IFE Total Weighted Score The total weighted score which is derived from the IFE matrix based on division internal, factors weight and rating IFE Total Weighted Score

The total weighted score which is derived from the EFE matrix based on division external factors weight and rating The structure of IE matrix is shown as (Figure 1.3)

Figure 1.3: The structure of IE matrix

The IE matrix have to important dimensions IFE total weighted score on x-axis and EFE total weighted score on y-axis The numbers represent the cells and circles are the divisions plotted base on IFE and EFE scores