Chapter two

STRATEGY ANALYSIS & FORMULATION

 Vision without Action is a Daydream

 Action without Vision is a Nightmare

Instructor: Abebe Shanko

(PhD candidate)
Strategic Mgmt Chapter 2. 1
After Completing this chapter students will be able to:
Clarify strategic intent
Differentiate the different components of strategic intent
Conceptualize I/O model of above average returns
Explain resource based model of above average returns
Discuss environmental analysis; meaning of environment,
categories of environment and its importance in setting
strategic intent of the organization.

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2.Strategic intent is the term used to describe the
aspirational plans, overarching purpose or intended direction
of travel needed to reach an organizational vision.
• Beneficial change results from the strategic intent,
ambitions(motivations) and needs of an organization.
Features Of Strategic Intent
• The specific features of strategic intent are best thought
of as a hierarchy or pyramid of sorts. Let’s look at the
levels from the ground up, starting with vision:

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 1. Vision: A firm’s vision articulates the aspirational view of where the firm
wants to be. A vision may sound as easy as scribbling down a few broad
statements. But it’s not that simple since the future is uncertain. A good vision
takes into account what kind of new trends or shocks an industry might
experience.
2. Mission: A vision talks about “where” a firm wants to be. A mission speaks
to “why” a firm started up in the first place. A great mission explains to
shareholders the “non-negotiable” values that a firm embodies as it carries out its
business.
3. The business definition aspect of strategic intent is pretty self-
explanatory. A firm’s business definition is the “x’s and ’s” of
how revenues and profits are made. For strategic intent, a
crystallized understanding of business definition is important in
order to understand areas of relative advantage/disadvantage.
4. A firm’s business model speaks to how a firm operates around the definitional
components. A business model is purposeful and a point of differentiation within a firm’s
strategic intent. In what way is firm X’s business model similar and different from firm Y’s?
5. Goals & Objectives are the base of measurement.
Generally, the vision, mission, business definition, and business model explains the
philosophy of business but the goals and objectives are established with the purpose of
achieving them.
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STRATEGY ANALYSIS & FORMULATION ;Developing Vision & mission
2.1 Vision
-Vision describes the route a company intends to take in developing &
strengthening its business. It pants a picture of a company’s
destination & provides a rationale for going there.
• Vision is a statement of what you would like to become.
Vision is an imaginary view of the future, which all the
organizational members believe in, and is not easily
achieved.
The vision statement helps the organizational members to
know where the organization is going to be in the future.
The vision statement should answer the basic question,
what do you want to become?
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• It should be long-term and an ultimate stretch goal –
most likely something that will never be attained.
(i.e., We strive to be the world’s best supplier of
XXXX)
• A Vision statement outlines what a company wants
to be. It concentrates on the future;
• Hickman and Silva (1984): define it as a “mental trip
from what is well-known to what is much stranger,
the creation of the future from an assemblage of real
facts, hopes, dreams, risks and opportunities.”

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 Benefits of having a vision statement
• Good visions are inspiring and exhilarating/exciting.
• Good visions help in the creation of a common
identity and shared sense of purpose.
• It provides clear decision-making criteria
• A clear vision provides the foundation for developing
a comprehensive mission statement

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• Vision statement Examples :
1. “To be the world leader in transportation products and
related services.” (General Motors)
2. “Our vision is to be the world’s best quick service
restaurant.” (McDonald’s)
3. “To make the automobile accessible to every American.”
(Ford Motor Company’s vision when established by
Henry Ford)

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2.2 Mission statement
•Mission statements are lasting statements of purpose that distinguish one
business from other similar firms.
•A mission statement identifies the scope of a firm’s operations in product
and market terms.
• It addresses the basic question that faces all strategists: “What is our
business?”
•A clear mission statement describes the values and priorities of an
organization.
•A mission is a statement of how we will accomplish our vision.
•It should include a summary of core competencies and competitive
differentiation. (i.e., We supply the best XXXX with unique capabilities in
XXXXX to deliver superior value to our customers)
•A Mission statement talks about what the company is now.
• It concentrates on present; it defines the customer(s), critical processes and
it informs you about the desired level of performance
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 Specifically, a good mission statement reflect the following set of
elements:
1. Customers—Who are the firm’s customers?
2. Products or services—What are the firm’s major products or services?
3.Markets—Geographically, where does the firm compete?
4. Technology—Is the firm technologically current?
5. Concern for survival, growth, and profitability—Is the firm committed
to growth and financial soundness?
6. Philosophy—What are the basic beliefs, values, aspirations, and ethical
priorities of the firm?
7. Self-concept—What is the firm’s distinctive competence or major
competitive advantage?
8. Concern for public image—Is the firm responsive to social, community,
and environmental concerns?
9. Concern for employees—Are employees a valuable asset of the firm?
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 2.2.1Characteristics of Good Mission Statement
•Good mission statements should be brief, distinctive and wide
in scope; ‘short in numbers and long in rhetoric’ in that they
identify the purpose of the organization without too many
limitations.
Specifically it should be:
1.Broad in scope; do not include monetary amounts, numbers
percentages, ratios etc.
2.Less than 250 words in length
3.Inspiring
4.Identify the utility of the products of the firm
5.Reveals that the firm is socially and
environmentally responsible
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 2.2.2 Benefits of Mission
• Creating an effective mission statement provides the following
benefits.
• A mission statement gives direction to the organization
• Based on the mission ,the objectives and strategies of the
organization are formulated.
• Mission statements help in stimulating positive emotions
about the organization.
• Mission statement helps in resolving the different views of the
managers.
• With the help of mission statement ,every one in the
organization will come to know about the purpose and there
will be no exception
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2.3 Goals
 Goals denote what an organization hopes to accomplish in a
future period of time in a broader aspect.
 They represent the future state or outcome of effort put in
now.
 A broad category of financial and non-financial issues are
addressed by the goals that a firm sets.

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2.4 Setting objectives
Objectives are the ends that state specifically how the goals shall be achieved.
They are concrete and specific in contrast to goals that are generalized.
In this manner, objectives make the goals operational. While goals may be
qualitative, objectives tend to be mainly quantitative in specification.
•Objectives are an organization’s performance targets- the results and outcomes
management wants to achieve.
•They function as yardsticks (indices) for measuring how well the organization is
doing.
•Well stated objectives are quantifiable, or measurable and contain a deadline for
achievement. Commonly, objectives should be SMART.
Examples.
•Reduce absenteeism by 5% by end year.
•Achieving lower overall costs than rivals.
•Achieving technological leadership
•Winning x% market share
Both short-term & long-tem objectives are needed.
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 2.3.1 Benefits of objectives
• With the help of objectives ,all the organizational members
can concentrate on one particular direction.
• Objectives are the targets on the basis of which actual
performance is measured.
• With the help of objectives ,the organizations can show
their priorities or preferences.

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•Difference between vision, mission,
objective and goals
•The concept of vision, mission, objective and goals are
interlinked and interrelated to each other.
•Besides from this connection there are certain focal
points on the basis of which some differentiation can
be done. Following are some distinctions among these
terms:

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Basics Mission Vision
Concepts It defines the purpose and It communicates both
primary objectives related to your purpose and values of your
customer needs and team values business.

Answer It answers the question: How you It answers the question:

will get to where you want to be? Where you want to be?

Purpose The purpose is to inform what The purpose is to inspire

the organization does. people & motivate their
emotional drives to achieve it.
Time A mission statement talks about A vision statement talks
Frame the present which ultimately about the future of the
leads to the future. organization.

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Basics Objective Goals
Concepts It represents managerial It refers to the long term
commitment to achieve specified purpose which an
results in a specified period of time. organization strives to
achieve.
Measurement It is easy to measure them as It is difficult to measure them.
they are generally quantifiable.

Time Frame They are mid-term or short term in They are long term in nature
nature

Action It refers to the specific action It refers to a generic action

which supports the associated goal. towards which one strives.

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•The followings are the two models firms use to generate the
information they need to form their vision and mission and
then to select and decide how to implement one or more
strategies.
1. The I/O model of above average returns
•The industrial organization (I/O) model of above-average
returns explains the external environment’s dominant
influence on a firm’s strategic actions.
2. The resource based model of above average returns
•The resource-based model assumes that each organization is a
collection of unique resources and capabilities.
•The uniqueness of its resources and capabilities is the basis for
a firm’s strategy and its ability to earn above-average returns.
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2.5 Environmental analysis
•What is environment?
•Environment refers to the surroundings ,
external objects , influence or circumstances in
which someone or something occurs.
• As the environment affects an organization in
many different ways, it is very essential for the
managers to understand it.

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2.5.1 Characteristics of Environment
Environment is complex. The environment includes many factors,
events conditions, & influences emerging from various sources.
• Environment is dynamic ,the environment is continuously changing
in nature
Environment is multifaceted
The shape and character of an environment relies on the perception of the
observer. Different observers perceive changes in the environment or new
development differently. It is often observed that the same type of development
is considered as an opportunity by one organization & threat by another
organization
Environment has a far – reaching impact
• Environment has a significant impact on organizations. The growth
& profitability of the organization relies mainly on environment in
which it carries out its operation
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2.5.2 Major component of an organization’s external environment
•Changes in external forces translate in to changes in consumer
demand for both industrial and consumer products and
services.
• External forces affect the types of products developed, the
nature of positioning and market segmentation strategies, the
types of services offered, and the choice of businesses to
acquire or sell.
•External forces directly affect both suppliers and distributors.
•Identifying and evaluating external opportunities and
threats enable organizations to develop a clear mission, to
design strategies to achieve long-term objectives, and to
develop policies to achieve annual objectives.

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1. Economic factors 2. Technological factors
a. Disposable Income
a. New discoveries/developments in
b. Interest Rates own or related (e.g.
c. Exchange Rates supplier) industry
d. Economy Growth Rates b. Speed of technology transfer
e. Unemployment Levels (diffusion)
f. Energy and Basic Raw c. Government spending on
Material Prices research,
d. Rates of obsolescence

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3. Legal factors 4. Political factors
a. Employment law i. Government stability,
b. Competition legislation ii. Taxation policy
c. Environmental iii.Government spending,
protection laws iv.Government relations
with other countries,
d. Foreign trade
v. Industrial policy (e.g.
regulations Towards privatization
e. Planning regulations. and regulation

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5. Social factors
a. Population demographics g. Physical Environment
b. Culture h. Global Environment
c. Levels of education
d. Lifestyle changes
e. Attitudes to work and
leisure
f. Consumerism
g. Social mobility

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A model of the macro-environment(based on Fahey &Narayanan,1986 )
• .
Sociological factors Political factors

Economical factors Technological factors

Analysis for identifying ,tracking, projecting & assessing trends,4 stages

1. Scanning the environment to detect ongoing and emerging change
2.Monitoring specific environmental trends and pattern to determine their
evolution
3. Forecasting future direction of environmental changes
4. Assessing current and future environmental changes for their strategic &
organizational implications
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6. Competitive Environment
•The nature of competition in an industry of a firm is
directly affected by the developments in the
competitive environment.
•The competitive environment includes; competitors,
customers, & suppliers.
•The key concept and analytical technique, which are
used by managers to evaluate their competitive
environment, are, Michael porters five forces model
which shows the way in which these forces are used for
describing profitability in an industry.
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Potential entry of competitors
Whenever new firms easily
enter into particular
industry, the intensity of
competitiveness among
firms increases

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• Substitute products are those products that
are produced by the competitor industry
and which perform similar function as that
of products produced by the other industry
• The existence of substitute goods prevents
the competitors’ from charging high prices
and if there is a raise in the price of any
substitute good then the customer’s
preference, any loyalty shifts toward the
relatively substituted products

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The process of performing an external audit
1.Gather information about economic, social, cultural
demographic, environmental, political, governmental
legal and technological trends.
2.Evaluated the information gathered from different
means.
3. Discuss opportunities and threats facing the firm in
meeting.

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F.g. Inputs for forecasting .

Scanning
Monitoring
Forecasting
Competitive
intelligence

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Environment scanning
The scanning of environment deals with the
analysis of external environment to a firm for
estimating the environmental changes in future
and for recognizing the already existing changes
Environmental scanning provides information to
the organization about the critical trends and
events before the changes have actually
established.
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Environmental monitoring
•The environmental monitoring monitors the evolution
of environmental trends, series of events or sequence
of activities.
• The process of monitoring helps the firm to analyze
how drastically the environment trends are changing
the competitive perspective.
• The environmental scanning provide information
about the trends, which needs close monitoring and
close evaluation.
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Competitive intelligence
•A Competitive intelligence assists an
organization to avoid surprises or shocks by
predicting moves & decreasing the response
time of competitors.
•It involves assembling of competitive
intelligence related with gathering data on
competitors and predicting such data for
taking managerial decisions
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Environmental forecasting
•Forecasts are educated assumption about
future trends & events.
• Forecasting is complex activity because of
factors such as technological innovation,
cultural change , new changing social
values, unstable economic condition etc.

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• Generally, organizations operate in 3 environments

Far environment (responding)

Far environment (responding

Internal
environment
Internal
environment
(Control)
Near environment
(Influence)

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 Three environments
1.Internal environments of staff, resources,
& facilities within the organization and
also include system & processes that bind
the resource of the organization together
and determine its organizational
capabilities.
• We can control the internal environment
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Internal assessment
1.The nature of an internal audit
All organizations have strengths & weaknesses in the
functional areas as of business.
 No enterprise is equally strong or weak in all areas.
A firms strengths that can’t be easily imitated by competitors
are called distinctive competencies,
 Building competitive advantages involves taking advantage
of distinctive competencies.

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The process of performing an internal audit
•Gathering and assimilating information about the firm’s
management, marketing, finance, /accounting, production/
operation, R&D and management information system
operation.
• Key factors should be prioritized so that the firms’
strengths & weakness can be determined collectively.

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•Resources, Capabilities and Core Competencies
•Resources, capabilities, and core competencies are the
characteristics that make up the foundation of
competitive advantage. Resources are the source of a
firm’s capabilities.
•Capabilities in turn are the source of a firm’s core
competencies, which are the basis of competitive
advantages.
•Combinations of resources and capabilities are
managed to create core competencies.

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•Resources
•Broad in scope, resources cover a spectrum of individual, social,
and organizational phenomena.
•Typically, resources alone do not yield a competitive advantage.
•In fact, a competitive advantage is created through the unique
bundling of several resources.
•Some of a firm’s resources are tangible while others are
intangible Tangible resources are assets that can be seen and
quantified.
•Production equipment, manufacturing plants, and formal
reporting structures are examples of tangible resources.

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•Intangible resources include assets that typically are rooted
deeply in the firm’s history and have accumulated over time.
• Because they are embedded in unique patterns of routines,
intangible resources are relatively difficult for competitors to
analyze and imitate.
•Knowledge, trust between managers and employees, ideas the
capacity for innovation, managerial capabilities,
organizational routines (the unique ways people work
together), scientific capabilities, and the firm’s reputation for
its goods or services and how it interacts with people (such as
employees, customers, and suppliers) are all examples of
intangible resources.
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•Capabilities
•Capabilities are the firm’s capacity to deploy
resources that have been purposely integrated to
achieve a desired end state.
•The glue binding an organization together,
capabilities emerge over time through complex
interactions among tangible and intangible resources.
•Critical to the forming of competitive advantages,
capabilities are often based on developing, carrying,
and exchanging information and knowledge through
the firm’s human capital.
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•Core Competencies
•Core competencies are resources and capabilities
that serve as a source of a firm’s competitive
advantage over rivals. Core competencies
distinguish a company competitively and reflect
its personality.
•Core competencies emerge over time through an
organizational process of accumulating and
learning how to deploy different resources and
capabilities.
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•Some resources or capabilities may stifle or
prevent the development of a core competence.
•Firms with the tangible resource of financial
capital, such as Microsoft, which has a large
amount of cash on hand, may be able to purchase
facilities or hire the skilled workers required to
manufacture products that yield customer value

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• Core Competences for Competitive Advantage
• Core competences which confer competitive advantage to a firm
have four attributes:
Value--the resource allows the firm to conceive of and
implement strategies that effectively deal with opportunities
and threats
Rarity--the resource is generally unavailable to large numbers
of current or potential competitors.
 Not imitable--the resource cannot be easily obtained by
competitors
 Non-substitutability there are no strategically equivalent
valuable resources available to competitors. Resources are
substitutes when they can each individually be used to
implement the same strategies.

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2.The near environment/micro
•It includes:
Input suppliers or suppliers of inputs
Workers’ union
Customers
Marketing intermediaries
Competitors
•These can not be controlled but, they can be
influenced.
•The players of microenvironment do not affect all
companies in the industry in the same way.
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3. Far environment/Macro
•The macro environment includes factors that can be
neither controlled nor influenced from within the
organization.
•They are normally called PESTLND factors
•Political, Economical, Social, Technological, Legal,
Natural & Demographic factors
•Some firms can influence political factors by lobbying
•But for most managers the best they can hope for is to
understand & anticipate the far environment because it
is beyond their control., We shrink from the unfamiliar
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 .
•To be successful, organizations must anticipate
possible change and position themselves to deal
with opportunities and challenges in a proactive
rather than a reactive way.
•A proactive relationship with ones environment
implies that it is important to keep close contact
with that environment.
• But there is a vast difference in doing this from
“the inside –out “as opposed to the “outside-in”.

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•Many organizations are preoccupied
. with “inside-out”
management.
• They understand and act in relation to their environment in
terms that make sense from internal or in terms of what
powerful members want to do.
•As a result, they often end up acting in inappropriate way.
• Others, try to build from “ the outside in “ in the sense that
they embrace the environment holistically and shape internal
structure and processes with the wider picture in mind.
•They use views and needs of customers and other key
stakeholders as a mirror through which they can see and
understand their own strengths and weakness

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Galatoomaa!!
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