Luận văn thạc sỹ: VNYP – strategic choices for the period of 2010 - 2015

The modern business environment is changing day by day. Vietnam by far has been considered one of the fastest growing economies in the region and the country has been witnessing so many changes on its way towards a truly market economy. An important milestone in the way of global integration for Vietnam was marked when Vietnam joined WTO in October 2007. With this important event, a lot of opportunities and difficulties had been opened up for Vietnamese enterprises. So, it is time to come to the point of strategic thinking and making strategic choices. Strategic orientation and planning will help leaders of a company decide where their organization has to go, and whether they are going on the right direction or not. Leaders with a good strategy will make the company grow by grasping the opportunities and avoiding the threats that the environment brings to them. And in this case, Viet Nam Telephone Directory and Yellow Pages 1 Joint Stock Company (VNYP) also has to think about strategy for a new forwarding period. As a member of Vietnam Posts & Telecommunications Group, VNYP is the formal and biggest supplier of “Telephone Directory and Yellow Pages” in Vietnam during the last 17 years. After 17 years, the company has obtained many satisfactory achievements concerning portfolio of products and services as well as turnover and service quality. The trade name “Yellow Pages” has become familiar to almost everyone. However, in the new business environment which was discussed above, VNYP is facing with many difficulties including: - Decline in revenue from yellow pages in the past two years - Strong competition from Google and internet search engine optimizations - Low productivity and low performance quality - Increase of job resignation in the company In 2011-2015 periods, business environment continues to experience new and complicated happenings; domestic and foreign competition factors will have more effects on the economy. All these problems are concerning the company’s survival, growth and development. They are strategic issues. VNYP should carefully analyze the situation, formulate and choose appropriate, “the right” strategies for its survival and development in the coming period, to be along with the recovering trend of world economy. The thesis “VNYP – strategic choices for the period of 2010 - 2015” is coming in order to point out some main suggestions and recommendations to help meeting the requirement of those changes.

MINISTRY OF EDUCATION AND TRAINING

NATIONAL ECONOMICS UNIVERSITY

NEU BUSINESS SCHOOL

LE THI BANG

VNYP - STRATEGIC CHOICES

FOR THE PERIOD OF 2010-2015

MASTER OF BUSINESS ADMINISTRATION THESIS

60.34.05

HANOI, 2010

MINISTRY OF EDUCATION AND TRAINING

NATIONAL ECONOMICS UNIVERSITY

NEU BUSINESS SCHOOL

HANOI, 2010

ACKNOWLEDGEMENT

This thesis is to fulfill the requirement from the Master of Business Administration(MBA) program, Business School – The National Economics University (NEUBusiness School)

First of all, I would like to thank all of the MBA professors of National EconomicsUniversity, who have equipped me with a lot of valuable knowledge and skills Iwould like to send my sincere thanks to my supervisor, Associate Professor, Dr VuThanh Hung who guided me enthusiastically during the last thesis’simplementation I also thank to my E-MBA 7C classmates for their preciouscomments on this thesis

Besides, I would like to thank all VNYP’s staffs who provided me many pieces ofadvice and directions for conducting the research to finish this thesis I also thank

to my colleagues at VNYP who kindly shared with me their perspective andexpectation on the research Their support is very important and decisive factors tothe success of this thesis

Last but not least, I would like to express my thanks to my family who encouragedand supported me a lot during this MBA program

Le Thi Bang

TABLE OF CONTENTS

ACKNOWLEDGEMENT 3

TABLE OF CONTENTS 4

ABBREVIATION 6

LIST OF TABLES 7

LIST OF FIGURES 8

EXECUTIVE SUMMARY 9

CHAPTER 1: INTRODUCTION 11

1.1 RATIONALE 11

1.2 RESEARCH OBJECTIVES 12

1.3 RESEARCH QUESTIONS 12

1.4 RESEARCH METHODOLOGY 13

1.4.1 Research process 13

1.4.2 Data collection and analysis 14

1.5 SCOPE OF THE RESEARCH 16

1.6 STRUCTURE OF THE THESIS 16

CHAPTER 2: THEORETICAL BACKGROUND ON STRATEGIC CHOICES 17

2.1 STRATEGIC ISSUES 17

2.1.1 Strategy definition 17

2.1.2 Vision 17

2.1.3 Mission 17

2.1.4 Strategic objectives 18

2.2 STRATEGIC LEVELS 19

2.2.1 Corporate-level strategy 20

2.2.2 Business-level strategy 20

2.2.3 Functional-level strategy 21

2.2.4 Operation strategy 22

2.3 THE BENEFITS OF STRATEGY 22

2.4 STRATEGY FORMULATION PROCESS 22

2.5 MODELS FOR STRATEGIC ANALYSIS 24

2.5.1 External environment analysis 24

2.5.2 Internal environment analysis 31

2.6 MODELS FOR STRATEGIC CHOICE 36

2.6.1 Ansoff’s model of market development 37

2.6.2 Generic strategies 39

2.6.3 SWOT model 40

2.7 STRATEGY IMPLEMENTATION AND EVALUATION 41

CHAPTER 3: STRATEGIC ANALYSIS FOR VNYP 43

3.1 EXTERNAL ENVIRONMENT ANALYSIS 43

3.1.1 General environment analysis (PESTEL analysis) 43

3.1.2 Industrial environment analysis 51

3.2 VNYP’S INTERNAL ANALYSIS 61

3.2.1 Overview of VNYP 61

3.2.2 VNYP’s value chain analysis 69

3.2.3 VNYP’s Product Portfolio analysis (BCG matrix) 83

3.2.4 VNYP’s competitive advantages 85

CHAPTER 4: STRATEGIC CHOICES AND SOME MAIN SOLUTIONS FOR VNYP TO 2015 91

4.1 REVIEW VNYP’S VISION, MISSION AND VALUES 91

4.1.1 Vision 91

4.1.2 Mission 91

4.1.3 VNYP’s values: 91

4.2 STRATEGIC OBJECTIVES FOR VNYP IN THE PERIOD 2011-2015 91

4.2.1 Focusing on Key target market and Key product 92

4.2.2 Finding foreign distributor 92

4.2.3 Establishing strategic alliance 93

4.3 STRATEGY AT CORPORATE LEVEL FOR VNYP 93

4.3.1 Merger and Acquisition strategy 93

4.3.2 Diversification strategy 95

4.4 SWOT ANALYSIS FOR VNYP 97

4.5 STRATEGY AT BUSINESS LEVEL FOR VNYP 100

4.5.1 Product Life Cycle model 102

4.5.2 Strategic choices for product lines business of VNYP 105

4.6 SOME SOLUTIONS TO STRATEGIC MANAGEMENT OF VNYP IN THE PERIOD 2011-2015 108

4.6.1 Solutions to achieve financial perspectives 108

4.6.2 Solutions to achieve customer perspectives 109

4.6.3 Solutions to achieve internal process perspectives 110

4.6.4 Solutions to achieve learning and growth perspectives 110

CONCLUSION 112

REFERENCES 114

APPENDIX 115

PEST Politic, Economic, Society, Technology

PESTEL Politic, Economic, Society, Technology, Environment, Legal

R&D Research and Development

SBU Strategic Business Unit

SWOT Strength, Weakness, Opportunity, Threat

VNPT Viet Nam Posts and Telecommunications Group

VNYP Viet Nam Telephone Directory And Yellow Pages JSC.1 WTO World Trade Organization

LIST OF TABLES

Table 1.1: Data collection and analyzing tools for secondary data 14Table 1.2: Data collection and analyzing tools for primary data 15

Table 3.2: Vietnam demographic and economic indicators 47

Table 3.4: Number of enterprises registered in the period of 2000 - 2009 54Table 3.5: Opportunities and threats for VNYP in the period of 2011-2015 60

Table 3.7: VNYP’s products and services studied in the BCG matrix 83

Table 3.12: Summary strengths and weaknesses of VNYP 89

Table 4.2: Summary of strategies of product line 105

LIST OF FIGURES

Figure 2.2: Identifying strategy for a single business 21

Figure 2.5: The Five Forces Model of competition 27

Figure 3.1: The usage of top Yellow Pages sites in recent years 52

Figure 3.3: The number of ‘Yellow pages’ publications per year 70

Figure 3.5: Revenue of three distribution channels of VNYP 73

EXECUTIVE SUMMARY

Vietnam Telephone Dirctory and Yellow Pages have been in the market for over 17years The company is said to have been going upwards along with the Vietnammarket economy In 2005, the company was restructure and Vietnam TelephoneDirectory and Yellow Pages Join Stock Company 1 (shortly called VNYP) wasformed A lot of opportunities have been opened up for VNYP thanks to the fasteconomic growth and the favorable governmental policies that pave the way forthe development of public business sector in general as well as advertising industry

in particular To grasp the opportunities and sustainable growth during the nextperiod of 2011-2015, VNYP has to work out appropriate strategic choices for long-term development

The objectives of this thesis are: (1) Summarize and systemize relevant theories onstrategy to implicate for Vietnam yellow pages market analysis; (2) To analyzeexternal and internal business environment to identify strengths, weaknesses,opportunities and threats for VNYP; (3) Based on the combinations ofopportunities/threats and strengths/weaknesses, to work out suitable strategicchoices for VNYP during the period of 2011-2015; (4) To propose some mainsolutions to implement business strategy for VNYP in the new period

The author has collected secondary and primary data for analyzing the generalenvironment, industry environment that VNYP Company is operating in.Secondary data is collected from industrial reports, professional magazines andbooks… Primary data is collected by making in-depth interview with 5 leaders ofVietnam Advertising Association For VNYP internal environment analysis, most

of primary data is collected by conducting expert opinion survey (sample size of

10 people), VNYP staff opinion survey (sample size: 20 people), customer opinionsurvey (sample size: 50 people), in-depth interview with VNYP’s Board ofDirectors, in-depth interview with VNYP’s staff and by the author’s practicalexperience while working in VNYP These data and analysis has constituted a

complete picture that helps the author discover the opportunities/ threats/ strengths/weaknesses for VNYP Company.

The analysis of VNYP’s external and internal environment has pointed out thefollowing findings:

- General environment is favorable for VNYP’s future growth

- The advertising industry is at its starting stage with a lot of future potential

- VNYP is going ahead other competitors in the industry by its brand andreputation; technology and equipment; and human resouces

VNYP’s objectives during the year of 2011-2015 are:

- Providing the most effective platform for advertising and promotion;

- Being the most reliable source of business information of Vietnam

Based on these findings and VNYP’s vision, mission, and objectives, the strategicchoices for VNYP during the period of 2011-2015 have been recommended asfollow:

- At corporate level: VNYP should follow the strategy of RelatedDiversification For expansion, VNYP should use Merger & AcquisitionStrategy

- At business unit level: VNYP should use the strategy of ProductDefferentiation For sustainable development, VNYP should concentrate oneco-friendly products and services

After having strategic choices for VNYP, some strategic solutions have been touchupon They are Solutions to achieve learning and growth perspectives; Solutions toachieve internal process perspectives; Solutions to achieve customer perspectives;Solutions to achieve financial perspectives

Howerver, the solutions are just at a very preliminary level These should be donevery carefully and in great details before VNYP can start implementing thestrategies

CHAPTER 1: INTRODUCTION

1.1 Rationale

The modern business environment is changing day by day Vietnam by far hasbeen considered one of the fastest growing economies in the region and thecountry has been witnessing so many changes on its way towards a truly marketeconomy An important milestone in the way of global integration for Vietnam wasmarked when Vietnam joined WTO in October 2007 With this important event, alot of opportunities and difficulties had been opened up for Vietnamese enterprises

So, it is time to come to the point of strategic thinking and making strategicchoices Strategic orientation and planning will help leaders of a company decidewhere their organization has to go, and whether they are going on the rightdirection or not Leaders with a good strategy will make the company grow bygrasping the opportunities and avoiding the threats that the environment brings tothem And in this case, Viet Nam Telephone Directory and Yellow Pages 1 JointStock Company (VNYP) also has to think about strategy for a new forwardingperiod As a member of Vietnam Posts & Telecommunications Group, VNYP is theformal and biggest supplier of “Telephone Directory and Yellow Pages” inVietnam during the last 17 years

After 17 years, the company has obtained many satisfactory achievementsconcerning portfolio of products and services as well as turnover and servicequality The trade name “Yellow Pages” has become familiar to almost everyone.However, in the new business environment which was discussed above, VNYP isfacing with many difficulties including:

- Decline in revenue from yellow pages in the past two years

- Strong competition from Google and internet search engineoptimizations

- Low productivity and low performance quality

- Increase of job resignation in the company

In 2011-2015 periods, business environment continues to experience new andcomplicated happenings; domestic and foreign competition factors will have moreeffects on the economy All these problems are concerning the company’s survival,growth and development They are strategic issues.

VNYP should carefully analyze the situation, formulate and choose appropriate,

“the right” strategies for its survival and development in the coming period, to be

along with the recovering trend of world economy The thesis “VNYP – strategic choices for the period of 2010 - 2015” is coming in order to point out some main

suggestions and recommendations to help meeting the requirement of thosechanges

- Propose some main solutions to implement business strategy for VNYPfrom 2011 to 2015

1.3 Research Questions

The research will focus on answering the following questions:

- Which strategic theories are applicable for the research topic?

- Which environmental factors are influencing VNYP’s business?

- What is VNYP’s real status? What is its current strategy? How does itapply?

- What are the company’s advantages and shortcomings? Whatopportunities and challenges are there for VNYP’s?

- Which strategic choices and necessary solutions are most appropriate forVNYP’s business development in the next five years?

1.4 Research Methodology

1.4.1 Research process

The research methodology could be summed up as the chart below:

Figure 1.1: Research process

Source: Author’s idea

To figure out the current external environment for VNYP, 3 sources were usednamely relevant theoretical background, secondary data, and in-depth interviewwith experts in advertising industry

Report of environment analysis

Strategic choices for VNYP

Internal environment analysis

In order to find the internal environment of VNYP, 6 sources were used In thosesources, there are the same 3 sources which were used to analyze the externalenvironment and 3 different sources namely experts/staff opinion surveys, in-depthinterview with VNYP’s management board, in-depth interview with VNYP’s staff From those sources, the external and internal environment analysis was reported inthe Chapter 3 With each report, the strengths and weaknesses were indicated toclarify the current situation of VNYP and from that, strategy choices wererecommended for VNYP

1.4.2 Data collection and analysis

On purpose to guarantee the quality and quantity for the research, following is themethods shall be applied for collecting and analyzing data

Table 1.1: Data collection and analyzing tools for secondary data

collected Analyzi ng tools

Latest trend and development of the industry; The policy of thegovernment toward the future development of the industry

Graphs, charts, textual write-ups

VNYP’s background information

Graphs, charts, textual write-ups

Source: Author’s idea

Table 1.2: Data collection and analyzing tools for primary

Experts’ evaluation about VNYP and competitors

Experts’ opinion about the development of VN advertising industry, andpolicies that influence the future of the industry

What VNYP wants to become in the future

To find out major

In-depth interview with 5 keyVNYP’s staff who have over 3years of experience working atthe company

Good points, bad points

of VNYP and suggestion for improvement

Source: Author’s idea

1.5 Scope of the Research

Object : Strategic choices

Location : Vietnam Telephone Directory and Yellow Pages 1 Joint Stock

Company (VNYP)

Time : - Secondary data: from 2007 to 2009

- Primary data: 2010

1.6 Structure of the thesis

Apart from the acknowledgement, table of content, executive summary,introduction, conclusion, references, and appendix, the main parts of the thesis isdivided into four chapters as the following:

Chapter 1: Introduction

Chapter 2: Theoretical background related to strategic choices

Chapter 3: Strategic analysis for VNYP

Chapter 4: Strategic choices and some main solutions for VNYP during the period of 2011 - 2015.

CHAPTER 2: THEORETICAL BACKGROUND ON

vision for the company reality Thompson & Strickland (2003) suggest, “An organization’s strategy deals with how to make management strategic vision for the company reality – It represents the game plan for moving the company into an attractive business position and building a sustainable competitive advantage”.

2.1.2 Vision

Vision statement of the organization is to answer the question “What do we want

to become?” It is especially important for any managers to set up long-termobjectives and executives to achieve good performance A clear vision provides thefoundation for setting up strategy and all organization’s operations follow it

Developing a vision statement is first step in strategic planning Many visionstatements are single sentences only It may also contain a slogan, a diagram, or apicture – whatever grabs attention (8)

2.1.3 Mission

A statement of purpose, philosophy, beliefs, business principles, or a statement

“defining our business”: a mission statement reveals what an organization wants to

be and whom it wants to serve (2)

Mission statement is a declaration of an organization’s reason for being

A company’s mission differs from vision in that it encompasses both the purpose

of company as well as the basis of competition and competitive advantages (8)

Peter Drucker, who is often called “the father of model management”, said thatasking the question ‘what is our business?' is synonymous with asking the question

‘what is our mission’

A business mission is the foundation for priorities, strategies, plans, and workassignments It is the starting point for the design of material jobs and, above all,for the design of managerial structures (4)

2.1.4 Strategic objectives

Strategic objectives are broadly defined target that an organization must achieve tomake its strategy succeed Strategic objectives are, in general, externally focusedand (according to the management guru Peter Drucker) fall into eight major

classifications: (i) Market standing: desired share of the present and new markets;(ii) Innovation: development of new goods and services, and of skills and methodsrequired to supply them; (iii) Human resources: selection and development of

employees; (iv) Financial resources: identification of the sources of capital andtheir use; (v) Physical resources: equipment and facilities and their use; (vi)

Productivity: efficient use of the resources relative to the output; (vii) Socialresponsibility: awareness and responsiveness to the effects on the wider

community of the stakeholders; (viii) Profit requirements: achievement ofmeasurable financial well being and growth

Strategic objectives are used to concretize the mission statement They show thathow the organization can fulfill or move toward the mission and vision

According to Gregory G Dess from University of Texas at Dallas, for objectives to

be meaningful, they need to satisfy several criteria They must be SMART:

- Specific: This provides a clear message as to what need to be

accomplished

- Measurable: There must be at least one indicator that measure progress

against fulfilling the objectives

- Appropriate: It must be consistent with the vision and mission of

organization

- Realistic: It must be achievable target given the organization’s capabilities

and opportunities in the environment In essence, it must be challenging butachievable

- Timely: There needs to be a time frame for finishing the objectives.

2.2 Strategic levels

In order to give suitable strategies and especially to assign responsibility formanagement levels, in diversified enterprises, strategies are initiated as fourdistinct organization levels There is a strategy for the company and all of itsbusiness as a whole (corporate strategy) There’s a strategy for each separatebusiness the company has diversified into (business strategy) Then there is astrategy for each specific functional unit within a business (functional strategy).Each business usually has a production strategy, a marketing strategy, financestrategy, and so on And, finally, there are still narrower strategy for basicoperating unit-plants, sales districts and regions, and departments within functionalareas (operating strategy) Figure 2.1 below shows the strategy-making pyramidfor diversified company (8)

Figure 2.1: The strategy-making pyramid

Source: 8, pp52

Corporate strategies

Business strategies

Functional strategies

Operating strategies

Responsibility of corporate-level managers

Responsibility of business-level general managers

Responsibility of heads of major

functional activities within a business

unit or division managers

Responsibility of plant managers,

geographic unit managers, and

lower-level supervisors

2.2.2 Business-level strategy

Business strategy is level number 2 of 4 strategic levels It refers to the managerialgame plan for a single business It shows the way to achieve successfulperformance in one specific line of business Therefore, a single-businesscompany, corporate strategy and business strategy are one and the same

Thompson and Strickland defined: “Business strategy concerns the actions and the approaches crafted by management to produce successful performance in one specific line of business; the central business strategy issue is how to build a stronger long-term competitive position” The core elements of business strategy

are illustrated by the Figure 2.2

All of strategy levels are not independent of each other They have a close relationand unification Business strategy is set up based on corporate strategy It is

processed from top to down Different management levels are in charge to managedifferent strategy level Corporate strategy is responsibility of corporate-levelmanagers, business strategy is responsibility of business-level managers,functional strategy is responsibility of heads of major functional activities within abusiness unit or division and operating strategy is responsibility of plant managers,geographic unit managers, and managers of front line operating units.

Figure 2.2: Identifying strategy for a single business

(The action plan for managing a single line of business)

KEY FUNCTIONAL STRATEGY TO BUILD COMPETITIVELY VALUABLE RESOURCE STRENGTHS AND CAPABILITIES

Supply chain

management

strategy

Manufacturing strategy

Sale, marketing promotion and distribution strategy

Human resource strategy

Financial strategy

R&D,

technology,

engineering

strategy

Planned, proactive moves to

out-compete rivals (better

product, added features, improved quality or service, better e-commercial

capabilities, superior technologies, wider product lines, and so on)

Moves to respond and react to changing condition in the macro environment and industry and competitive condition

Scope of geographic

coverage (local,

regional, national, multinational, or global)

Efforts to build competitive

advantage

Lower costs relative to rivals

A different or better product

offering compared to rival?

Superior ability to serve a

market niche or specific

group of buyers

Collaborative partnerships and strategic alliances with others

customer service, distribution, finance, human resource, and so on; a businessneeds as many functional strategies as it has major activities (8)

2.2.4 Operation strategy

The operation strategy how to manage front line organizational unit within abusiness (plant, sale, district, distribution center) and how to perform strategicallysignificant operating task (material purchasing, inventory control, maintenanceshipping, advertising campaigns) (8, pp57)

2.3 The benefits of strategy

Studies show that if applied management strategies organizations will performbetter than organizations do not perform this process Achieved if appropriatebetween environmental organization’s strategy, structure and process will generatepositive effects on the performance of the organization Benefits of managementstrategy have been tested in many different fields can be in short with the threemost basic elements:

- Develop clear strategic scenario for the company

- Focusing more precisely on the important strategy

- Improve awareness of the rapidly changing environment

However, achievement of affective management strategies always needs a formalprocess and it can start with questions:

- Where is the organization?

- If no changes are to be made after 1 year, 2 years, 3 years, 5 years, 10years, will it be acceptable or not?

- If the answer is not acceptable, is it necessary to implement specificmanagement actions? What should be considered as risks and interests?

2.4 Strategy formulation process

The growing complexity of the competitive landscape, the rising importance of theglobal issues in strategy formulation, and the enormous diversity in corporateidentities, strategic postures, and challenges suggest that “recipe”-driven

approaches to strategy formulation are doomed to failure Nevertheless, at thebroadest level, strategic thinking involves three principal steps: (i) a “where are wenow?” analysis, (ii) a “where do we go?” assessment, (iii) a “how do we getthere?” appraisal (3).

Figure 2.3: The strategy formulation process

Source: Summarized by author

A scan of external and internal environment is an important part of strategicplanning process This analysis focuses on monitoring and evaluating theenvironment in which a firm operates as well as its current situation and activities.Whereas, the first step “where are we now” is focused on taking stock of where thebusiness of the company as a whole today, it is also providing an assessment of

Evaluating current performance

Strategy options

External environment analysis Internal environment analysis

Matching internal – external

environment

Setting up Vision/Mission/Objectives

Business A strategy

Evaluation - Implementation

Business B strategy

Business C strategy

Business D strategy

relevant trend in the broader sociopolitical, economic, legal and technologicalenvironment.

The second step “where do we go” is concerned with generating strategicalternative based on the assessment of the first step

The third step “how do we get there?” is dialed with detailed question of how toachieve the desired objective The end product is a detail set of strategies thatforms the basis for communicating the chosen direction throughout theorganization and formulating intermediate and subordinate goals and plans

2.5 Models for strategic analysis

2.5.1 External environment analysis

The purpose of an external analysis is defining the list of opportunities that couldbenefit a firm and threats that should be avoided The external analysis includestwo categories that are macro-environment and competitive (micro) environmentanalysis

The macro-environment includes all relevant forces outside of the company’sboundaries-relevant that are population demographics, societal value and lifestyle,governmental legislation and regulation, technological factors macro-environmentanalysis will show clearly general environment which can affect to a firm’sbusiness at the current and in the future

The competitive environment is competitive forces which affect directly to firm.Analyzing it will help us define clearly effective factors such as buyers, rivalry,suppliers, substitutes and new entrants

2.5.1.1 General environment analysis - PESTEL model

Originally designed as a business environmental scan, the PESTEL analysis is ananalysis of the external macro environment in which a business operates These areoften factors which are beyond the control or influence of a business, however areimportant to be aware of when doing product development, business or strategyplanning

A scan of the macro-environment in which the firm operates can be expressed interms of the following factors: Political, Economic, Social, Technological,Environment and Legal A good start is to list all of the trends a firm can find andindicate whether they will have a positive impact or negative impact on the size ofthe firm’s industry.

 Political factors: Global, national, regional, local and community trends,

changes, events etc

 Economic factors: World, national, local trends, changes, events etc.

Economic forces regulate the natural and trend of the national economy includingthe exchange of materials, money, energy and information

The economy has an impact on all industries, from suppliers of raw materials

to manufacturers of finish goods and services, as well as all organizations inservice, wholesaler, retailer, government, and nonprofit sectors Key economicindicators include interest rates, unemployment rate, the consumer price index(CPI), the gross domestic profit (GDP) and net disposable income (8)

 Socio-cultural factors: Developments in society – culture, behavior,

expectations, composition etc Socio-culture forces influence the value, beliefs,and lifestyle of a society They have major impact on customer need, product,service and market

 Technological factors: Developments: computer hardware, software,

applications, other equipment, materials, products and processes etc Technologicalforces are key roles in problem solving renovation: the internet, changes inlifecycle of products, speed of delivering, new products and services inventions.Development in technology leads to new product and services and improve theway they are produced and delivered to end-users Innovation can create entirelynew industries and alter the boundaries of existing industries It presents theopportunities and threats that must be considered in the strategy formulationprocess

 Environmental factors: Global, national, local issues, pressures,

movements etc They are ecological, environmental issues and regulations whichcan influence customer, market and stakeholder/investor values, and staff attitudes

It presents the opportunities and threats that must be considered in the strategyformulation process

 Legal factors: World, national legislation changes, prospects etc Legal

factors include government policies, legal which affect to firm’s business Some of

it includes tax policy, trade tariffs, environmental regulation, and socioeconomicdevelopment policy

Figure 2.4: PESTEL model

Source: Synthesized and drawn by author

2.5.1.2 Industrial analysis - Five-force model:

Five forces model was developed by Professor Michael E Porter of theHarvard Business School in 1980 It is one of the most useful tools for scanningthe micro-environment It helps analyzing the state of competition in an industry.The figure 2.5 shows this model as a key analytical tool for diagnosing thecompetitive environment

 The Rivalry among Competing Sellers: The intensity of rivalry is

influenced by the following industry characteristics: a larger number of firms, slow

market growth, high fixed costs, high storage costs or highly perishable products,low switching costs, low level of product differentiation, high exit barriers, adiversity of rivals…

The strongest of the five competitive forces is usually the jockeying for positionand buyer favor that goes on among rival sellers of a product and service (7, pp81).The highly competition between competitors causes pressure on price, margin,profit etc for every player in the industry The strategy pursued by one firm can besuccessful only to the extend they provide the competitive advantages over thestrategies pursued by rival firms Changes in strategies by one firm may be metwith retaliatory countermoves, such as lowering prices, enhancing quality, addfeatures, providing services, extending warranties, and increasing advertising (4)

Figure 2.5: The Five Forces Model of competition

Source: www.justice.gov/atr/public/hearings/single_firm/docs/218691.htm

 The Potential Entry of New Competitors: Whenever new firms can

easily enter a particular industry, the intensity of competition among firmincreases Barriers to entry include the need to gain economies of scale quickly, theneed to gain technology and specialized know-how, the lack of good distributionchannel, government regulation policies, tariff, etc Despite numerous barriers to

entry, new firms sometimes enter an industry with the product at higher quality,lower price, and substantial marketing resource (4).

 The Potential Development of Substitute Products: In Porter’s model,

substitute products refer to products in other industries There are many industrieswhere firms are in close competition with producers of substitute products in otherindustries The presence of substitute products puts a ceiling on the price that can

be charged before consumers switch to the substitute products Competitivepressures arising from substitute products increase as the relative price ofsubstitute products declines and as consumer switching costs decrease Thecompetitive strength of substitute product is best measured by the inroad into themarket share those products obtain, as well as those firms plan for increasedcapacity and market penetration (4)

 The Bargaining Power of Suppliers: The bargaining power of suppliers

affects the intensity of competition in an industry, especially when there are a largenumber of suppliers, where there are only a few good substitute raw materials, orthe cost of switching raw material is especially high It is often in the best interest

of both suppliers and producers to assist each other with reasonable prices,improved quality, development of new services, just-in-time deliveries, and reduceinventory cost, thus enhancing long-term profitability for all concerned (4)

 The Bargaining Power of Buyers: When customers are concentrated or

large, their bargaining power represents a major force affecting the intensitycompetition in an industry Rival firms may offer extended warranties or specialservices to gain customer loyalty whenever the bargaining power of customers issubstantial Bargaining power of buyers is also higher when products beingpurchased are standardized or undifferentiated When this the case, customersoften can negotiate selling price, warranty coverage, etc (4)

2.5.1.3 Industry evolution (Industry/Product Life-Cycle):

The life cycle of a product or an industry refers to the stages of introduction,growth, maturity, and decline that occur over the life of a product or an industry

It’s very important to consider product life cycle It has the emphasis on variousgeneric strategies, functional areas, value creating activities, and overall objectivesvary over the course of product life cycle Managers must become even moreaware of their firm’s strengths and weaknesses in many areas to attain competitiveadvantages (8) The figure 2.6 describes stages of product life cycle.

Createconsumerdemand

Defend marketshare andextend productlife cycle

Consolidate,maintain,harvest or exit

Figure 2.6: Stages of the product life cycle

Source: 4, pp177

Sta

ge

 Strategies in the introduction stage: In the introduction stage, products

are unfamiliar to consumers Market segment are not well defined, and productfeatures are not clearly specified The early development of an industry typicallyinvolves low sales growth, rapid technological change, operating losses, and theneed for strong source of cash to finance operations Since there are few playersand much growth, competition tends to be limited

Success in the introduction stage requires an emphasis on research anddevelopment and marketing activities to enhance awareness of products andservices The challenge become: (i) developing the product and finding a way toget users to try it, (ii) generating enough exposure so the product emerges as the

“standard” by which all other competitors’ products are evaluated (4)

 Strategies in the growth stage: Growth as the second stage of industry

life cycle is characterized by strong increase in sales This potential for strong sales(and profits) attracts others competitors who also want to benefit As products enterthe growth stage, the primary key to success has built preference for specificbrand This requires strong brand recognition, differentiated products and thestrong financial resources to support a variety of value change activities such asmarketing and sales, customer service, and research and development Revenue inthe growth stage increases at an accelerating rate because (i) new consumers aretrying the products, (ii) a growing proportion of satisfied consumers are makingrepeat purchases In general, as a product moves through its life cycle, theproportion of repeat buyers to new purchasers increases Conversely, new productand service often fail if there are relatively few repeat purchases (4)

 Strategies in the maturity stage: In maturity stage, the aggregate industry

demands begin to slow Since markets are becoming saturated, there are fewopportunities to attract new adopters It’s no longer possible to “grow around” thecompetition, so direct competition become predominates With few attractiveprospects, marginal competitors begin to exit the market At the same time, rivalryamong existing competitors intensifies because there is often fierce pricecompetition at the same time that expenses associated with attracting new buyers

are rising Advantage based on efficient manufacturing operations and processingengineering become more important for keeping costs low as customers becomemore price sensitive It also becomes more difficult for firms to differentiate theirofferings, because users have a greater understanding of products and services (4).

 Strategies in the decline stage: The decline stage occurs when industry

sales and profits begin to fall Typically, changes in the business environment are

at the root of an industry or a product group entering this stage Change inconsumer tastes or a technological innovation can push a product to decline When

a product enters into decline stage, it often consumes a large share of managementtime and financial resources relative to its potential worth Not only are sales andprofits declining, but also competitors may start drastically cutting their price toraise cash and remain solvent in short term The situation is further aggravated bythe wholesale liquidation of assets, including inventory, of some of the competitorsthat have failed This further intensifies price competition In this decline stage, afirm’s strategic option becomes dependent on the action of rivals If manycompetitors decide to leave the market, sales and profit opportunities increase Onthe other hand, prospects are limited if all competitors remaining players.Managers must carefully monitor the action and intention of competitors beforedeciding on a course of action Four basic strategies are available in the decline

stage: (i) Maintaining: refers to keep product going without significantly reducing

market support, technological development, or other investment, in the hope that

competitors will eventually exit the market; (ii) Harvesting: involves obtaining as

much profit as possible and requires that cost in decline be reduced quickly; (iii)

Exit the market: involves dropping the product from a firm’s portfolio; (iv) Consolidation: involves one firm acquiring at a reasonable price the beat of the

surviving firms in industry (4)

2.5.2 Internal environment analysis

After analyzing firm’s external environment which finds out opportunities andthreats, we scan firm’s internal environment which shows out strengths andweaknesses Normally, strengths and weaknesses of a firm will be found in a

variety areas and function activities: marketing, operation, logistic, finance,management information system, and so on.

An assessment of internal analysis is important to determining what strategies afirm successfully can pursue Analyzing a firm’s internal strategic environmentincludes 2 principal components: Resource-Base View (RBV), and Value ChainAnalysis (VCA)

2.5.2.1 Value Chain analysis:

The value chain is a systematic approach to examining the development ofcompetitive advantage It was created by Michael E Porter in his book,Competitive Advantage (1980) The chain consists of a series of activities thatcreate a build value They culminate in the total value delivered by anorganization

All firms in a given industry have a similar value chain, which is divided into twomain activities that are primary activities (inbound logistic, operation, outboundlogistic, marketing and sales, service) and support activities (generaladministration, human resource management, technology development, andprocurement) as shown in the figure 2.7 bellow:

Figure 2.7: The concept of a value chain

Source: commons.wikimedia.org

In analyzing a firm’s value creation process, explicit consideration should be given

to potential synergies between the different sources as suggested by linkagesbetween different value creating activities in the value chain Specific marketingactivities, for example, may affect other activities in the value chain such asmanufacturing or quality control The ‘margin’ depicted in the diagram is the same

as added value

 Inbound logistics are primarily associated with receiving, storing and

distributing inputs to the product It includes material handling, warehousing,inventory control, vehicle scheduling, and returns to suppliers (4)

 Operations include all activities associated with transforming inputs into

final product form, such as machining, packaging, assembling, testing, printing,and facility operation (4)

 Outbound logistics: the activities of outbound logistic are associated with

collecting, storing, and distributing the product and service to buyers Theseinclude finish good, warehousing, delivery vehicle operation, order processing andscheduling (4)

 Marketing and sales: sales and marketing activities are associated with

purchases of product and service by end use and the inducements used to get them

to make purchases These include advertising, promotion, sale force, quoting,channel selection, channel selection, channel relations, and pricing (4)

 Service: This primary activity includes all activities associated with

providing service to enhance or maintain the value of the product, such asinstallation, repair, training, part supply, and product adjustment (4)

 Procurement: This is a support activity Procurement refers to the

function of purchasing inputs used in the firm’s value chain, not to the purchasedthemselves Purchased inputs include raw materials, supplies, and otherconsumable items as well as assets such as machinery, laboratory equipment,office equipment, and buildings (4)

 Technology development: every value activity embodies technology The

array of technologies employed in most firms is very broad, ranging fromtechnologies used to prepare documents and transport goods to those embodied inthe product itself Technology product related to the product and its featuressupports the entire value chain, while other technology development is associatedwith primary or support activities (4)

 Human resource management: It includes such as recruiting, hiring,

training, development, and compensation of all type of personnel It supports bothindividual primary and support activities and entire value chain (4)

 Firm infrastructure includes supports such as general management,

planning, finance, accounting, legal, government affair, quality management, andinformation system Administration (unlike the other support activities) typicallysupports the entire value chain and not individual activities

2.5.2.2 Product portfolio management (BCG matrix)

Companies that are large enough to be organized into strategic business units facethe challenge of allocating resources among those units The BCG growth-sharematrix displays the various business units on a graph of the market growth rate vs.market share relative to competitors

The BCG matrix is the most well-known portfolio management tool It is based onproduct life cycle theory It was developed in the early 70s by the BostonConsulting Group The BCG matrix can be used to determine what prioritiesshould be given in the product portfolio of a business unit To ensure long-termvalue creation, a company should have a portfolio of products that contains bothhigh-growth products in need of cash inputs and low-growth products that generate

a lot of cash

Figure 2.8: The Growth-Share (BCG) matrix

Source: www.openlearningworld.com

Resources are allocated to business units according to where they are situated onthe grid as follow:

 Cash Cows – a business unit that has a large market share in a mature,

slow growing industry Cash cows require little investment and generate cash thatcan be used to invest in other business units Cash cow division should bemanaged to maintain their strong position for as long as possible Productdevelopment or concentric diversification may be attractive strategies for strongcash cows However, as a cash cow division becomes weak, retrenchment ordivestiture can become more appropriate

 Stars – a business unit that has a large market share in a fast growing

industry represents the firm’s best long-run opportunities for growth andprofitability Therefore they should also generate large amounts of cash However,

if needed any attempt should be made to hold your market share in Stars, becausethe rewards will be Cash Cows if market share is kept Forward, back-ward, andhorizontal integration; market penetration; market development; product

development; and joint venture are appropriate strategies for these divisions toconsider (2).

 Question Marks – a business unit that has a small market share in a high

growth market These business units require resources to grow market share, butwhether they will succeed and become stars is unknown Question marks have theworst cash characteristics of all, because they have high cash demands andgenerate low returns, because of their low market share If the market shareremains unchanged, question marks will simply absorb great amounts of cash.These businesses are called “question mark” because the firm must decide whether

to strengthen them by pursuing an intensive strategy (market penetration, marketdevelopment, or product development) or to sell them (2)

 Dogs – a business unit that has a small market share in a mature industry.

A dog may not require substantial cash, but it ties up capital that could better bedeveloped elsewhere Unless a dog has some other strategic purpose, it should beliquidated if there is little prospect for it to gain market share

The major benefit of the BCG matrix is that it drawn attention to the cashflow, investment characteristics, and need of a firm’s various divisions Thedivisions of many firms evolve overtime: Dogs become Question Marks; QuestionMarks become Stars; Stars become Cash Cows, and Cash Cows become Dogs in

an ongoing counter-clockwise motion

2.6 Models for strategic choice

Strategy embodies two ideas: a long term vision of where a firm wants to go and adegree of flexible about how to get there As soon as the firm begins to implement

a chosen direction, it starts to learn about how well attuned the chosen direction is

to the competitive environment, about how rivals are likely to respond, and abouthow well prepared the organization is to carry out its mission Thus, rather thaninterpreting a strategy as a detailed long term plan, it is more accurate andpreferable to look at a strategy in term of portfolio of future options

2.6.1 Ansoff’s model of market development

The Ansoff Product-Market Growth Matrix is a marketing tool created by Igor

Ansoff and first published in his article "Strategies for Diversification" in theHarvard Business Review (1957) The matrix allows marketers to consider ways togrow the business via existing and/or new products, in existing and/or new markets– there are four possible product/market combinations This matrix helpscompanies decide what course of action should be taken given currentperformance The matrix consists of four strategies:

- Market penetration (existing markets, existing products): Market

penetration occurs when a company enters/penetrates a market with currentproducts The best way to achieve this is by gaining competitors' customers (part

of their market share) Other ways include attracting non-users of your product orconvincing current clients to use more of your product/service, with advertising orother promotions Market penetration is the least risky way for a company to grow

- Product development (existing markets, new products): A firm with a

market for current products might embark on a strategy of developing otherproducts catering to the same market For example, McDonalds is always withinthe fast-food industry, but frequently markets new burgers Frequently, when a firmcreates new products, it can gain new customers for these products Hence, newproduct development can be a crucial business development strategy for firms tostay competitive

Figure 2.9: Market strategy (Ansoff Matrix)

Source: www.tutor2u.net

- Market development (new markets, existing products): An established

product in the marketplace can be tweaked or targeted to a different customersegment, as a strategy to earn more revenue for the firm

- Diversification (new markets, new products): Virgin Cola, Virgin

Megastores, Virgin Airlines, Virgin Telecommunications are examples of new

products created by the Virgin Group of UK, to leverage the Virgin brand This

resulted in the company entering new markets where it had no presence before.The matrix illustrates, in particular, that the element of risk increases the furtherthe strategy moves away from known quantities - the existing product and theexisting market Thus, product development (requiring, in effect, a new product)and market extension (a new market) typically involve a greater risk than

‘penetration’ (existing product and existing market); and diversification (newproduct and new market) generally carries the greatest risk of all In his originalwork, which did not use the matrix form, Igor Ansoff stressed that thediversification strategy stood apart from the other three

2.6.2 Generic strategies

According to Porter's Generic Strategies model, there are three basic strategic options available to organizations for gaining competitive advantage They are: Cost Leadership, Differentiation and Focus These basic strategies are applied base on firm’s strengths and weaknesses comparing with competitors, and opportunities and threats from external environment which firm has faced Implementing follows which strategy is very important because it will decide firm’s accomplishment in achieving its long-term objectives

Figure 2.10: Porter’s Generic strategies

Source: Michael Porter, Generic Strategies

Cost leadership strategy: This generic strategy calls for being the low cost producer

in an industry for a given level of quality

Differentiation strategy: A differentiation strategy calls for the development of aproduct or service that offers unique attributes that are valued by customers and

that customers perceive to be better than or different from the products of theircompetitors.

Focus strategy: The focus strategy concentrates on narrow segment and within thatsegment attempts to achieve either a cost advantage or differentiation

Organizations that achieve Cost Leadership can benefit either by gaining marketshare through lowering prices (whilst maintaining profitability,) or by maintainingaverage prices and therefore increasing profits All of this is achieved by reducingcosts to a level below those of the organization's competitors

Companies that pursue a Differentiation strategy win market share by offeringunique features that are valued by their customers Focus strategies involveachieving Cost Leadership or Differentiation within niche markets in ways that arenot available to more broadly-focused players

2.6.3 SWOT model

To understand business environment of a particular firm, analysis of both generalenvironment and the firm industry and competitive environment is needed.Generally, a firm competes with other firms in the same industry An industry iscomposed of a set of firms that produce the same product or service, sell to similarcustomers, and use similar methods of production Gathering industry informationand understanding competitive dynamics among the different companies in yourindustry is the key to successful strategic management

One of the most basic techniques for analyzing firm and industry conditions is SWOT analysis SWOT stands for strengths, weaknesses, opportunities, threats SWOT analysis provides a framework for analyzing these four elements of a firm’s internal and external environment It provides “raw materials”, a basic listing of conditions both inside and surrounding the company The strength and weakness portion of SWOT refers to the internal conditions of a firm where firm excels (strengths) and where it may be lacking