The following information is used for educational purposes only.
What is SWOT analysis? What are the main aspects of SWOT analysis? How to write Good SWOT analysis of a company? Where to find information for SWOT analysis? Free SWOT Analysis Generator
SWOT Analysis Examples; Reports on Different Companies
SWOT analysis is also known as TOWS analysis.
Introduction
Environmental opportunities are only potential opportunities unless the organization can utilize resources to take advantage of them and until the strategic leader decides that it is appropriate to pursue the opportunity. It is therefore important to evaluate environment opportunities in relation to the strengths and weaknesses of the organization's resources, and in relation to the organizational culture. Real opportunities exist when there is a close fit between environment, values and resources. An evaluation of an organization's strengths and weaknesses in relation to environmental opportunities and threats is generally referred to as a SWOT analysis. The following report will look closely into the SWOT's concept, its main aspects, and criteria for successful and effective SWOT analysis.
Main Aspects of SWOT Analysis
SWOT has a long history as a tool of strategic and marketing analysis. No one knows who first invented SWOT analysis. It has features in strategy textbooks since at least 1972 and can now be found in textbooks on marketing and any other business disciplines. Its advocates say that it can be used to gauge the degree of "fit" between the organisation's strategies and its environment, and to suggest ways in which the organisation can profit from strengths and opportunities and shield itself against weaknesses and threats (Adams, 2005). However, SWOT has come under criticism recently. Because it is so simple, both students and managers have a tendency to use it without a great deal of thought, so that the results are often useless. Another problem is that SWOT, having been conceived in simpler times, does not cope very well with some of the subtler aspects of modern strategic theory, such as trade-offs (De Witt and Meyer, 1998).
Strengths
Determine an organisation's strong points. This should be from both internal and external customers. A strength is a "resource advantage relative to competitors and the needs of the markets a firm serves or expects to serve"
(http://www.css.nccu.edu.tw/mepa/mepa_course/2005/kao/ 20060221_1.ppt#1). It is a distinctive competence when it gives the firm a comparative advantage in the marketplace. Strengths arise from the resources and competencies available to the firm.
Weaknesses
Determine an organisation's weaknesses. This should be not only from its own point of view, but also more importantly, from those of the customers. Although it may be difficult for an organisation to acknowledge its weaknesses, it is best to handle the bitter reality without procrastination. A weakness is a "limitation or deficiency in one or more resources or competencies relative to competitors that impedes a firm's effective performance" (http://gift.postech.ac.kr/admin/bbs/data/summer_session_2004/ Corporate%20Strategy_ver%5B7%5D_final(1).ppt).
Opportunities
marketplace. After all, opportunities are everywhere, such as the changes in technology, government policy, social patterns, and so on. An opportunity is a major situation in a firm's environment. Key trends are one source of opportunities. Identification of a previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities for the firm.
Threats
No one likes to think about threats, but we still have to face them, despite the fact that they are external factors that are out of our control, for example, the recent economic slump in Asia. It is vital to be prepared and face threats even during turbulent times. A threat is a major unfavourable situation in a firm's environment. Threats are key impediments to the firm's current or desired position. The entrance of new competitors, slow market growth, increased bargaining power of key buyers or suppliers, technological changes, and new or revised regulations could represent threats to a firm's success.
Because SWOT is such a familiar and comforting tool, many students use it at the start of their analysis. This is a mistake. In order to arrive at a proper SWOT appraisal, other analyses need to be carried out first.
Since opportunities and threats mostly arise from the environment, SWOT analysis needs to take account of the results of a full environmental analysis.
It is impossible to gauge what an organisation's real strengths are until you have assessed its strategic resources - in fact, strategic resources and strengths are the same thing. There is a tendency for students to put down anything vaguely favourable that they can think of about a company as a strength. This temptation needs to be resisted - a strength is not a strength unless it makes a genuine difference to an organisation's competitiveness. The same is true of weaknesses.
For example, look at Southwest Airlines and Amazon.com. Both companies have important groups of potential customers to whom they offer poor service. Southwest ignores business passengers, and will not accept transfers from other airlines. Amazon makes people wait days to receive books that they can obtain instantly from their neighbourhood bookstores, and pay a delivery charge for the privilege. Surely, these are major threats. Southwest and Amazon have chosen not to give those customers priority. Serving them would divert resources from the firm's core markets, and dilute service to their main customers. Not serving them is certainly not a weakness; in a paradoxical way, it may be a strength.
The wizardry of SWOT is the matching of specific internal and external factors, which creates a strategic matrix and which makes sense. It is essential to note that the internal factors are within the control of organisation, such as operations, finance, marketing, and other areas. On the contrary, the external factors are out of the organisation's control, such as political and economic factors, technology, competition, and other areas. The four combinations are called the maxi-maxi (strengths/opportunities), maxi-mini (strengths/threats), mini-maxi (weaknesses/opportunities), and mini-mini (weaknesses/threats). Weihrich (1982) describes the four combinations as follows:
Maxi-maxi (S/O). This combination shows the organisation's strengths and opportunities. In essence, an organisation should strive to maximise its strengths to capitalise on new opportunities.
Maxi-mini (S/T). This combination shows the organisation's strengths in consideration of threats, e.g. from competitors. In essence, an organisation should strive to use its strengths to parry or minimise threats.
Mini-maxi (W/O). This combination shows the organisation's weaknesses in tandem with opportunities. It is an exertion to conquer the organisation's weaknesses by making the most of any new opportunities.
Mini-mini (W/T). This combination shows the organisation's weaknesses by comparison with the current external threats. This is most definitely defensive strategy, to minimise an organisation's internal weaknesses and avoid external threats.
How to Write a Good SWOT Analysis
A successfully conducted SWOT involves identifying the following:
The things an organisation does particularly well (strengths) or badly (weaknesses) at present.
The factors that in the future may give the organisation potential to grow and increase its profits (opportunities) or may make its position weaker (threats). Opportunities and threats normally arise from changes in the environment, but sometimes have their origin inside the organisation - for example, if key machinery or people, functioning very effectively at present, are likely to break down or retire in a few years' time, that is a threat.
It is important to bear in mind what a SWOT is for. It is intended to summarise a strategic situation, with a view to deciding what the organisation should do next. A SWOT analysis should contain sufficient information for any reader to be able to see why a particular issue counts as a strength, weakness, opportunity or threat, and what the implications are for the firm that you are analysing.
For the same reason, there is no room for equivocation in a SWOT analysis - a factor can be a strength or a weakness, but not both. For example, a firm's IT system may provide good management reports but poor production control information. It is pointless to put this down as both a strength and a weakness that partially cancel each other out, since managers have only two choices: either they upgrade the system or they do not (Mintzberg, 1990). This means that you need to come to a definite answer to the question: On balance, is the IT system a strength or a weakness? Perhaps the lack of good production information is important, in which case the system needs to be upgraded. Perhaps it is vital to maintain the flow of management information, in which case the system should not be touched (Thompson, 2002). SWOT analysis aims to differentiate factors from being bad or good for the company's performance. In a SWOT analysis, the strengths and weaknesses of resources must be considered in relative and not absolute terms. It is important to consider whether they are being managed effectively as well as efficiently. Resources, therefore, are not strong or weak purely because they exist or do not exist. Rather, their value depends on how they are being managed, controlled and used.
SWOT analyses should only pick out issues that have a substantial effect on a firm's competitive situation. You should avoid the temptation to put down under "Strengths" almost everything you can think of that is vaguely favourable to the firm, and to classify anything remotely unfavourable as a weakness. It should be rare, to make a genuine difference to the organisations' profitability - a strategic resource. A weakness, similarly, is something that affects the organisation's cost or differentiation advantage. Old-fashioned equipment and authoritarian management styles, for instance, are only weaknesses if they lead to increased costs, poor quality or bad customer service (Thompson, 2002; Adams, 2005).
Lists of strengths and weaknesses should not include factors that are common to every firm in an industry. For example, you could not count "well-known brand" as a strength for a firm in the jeans or cosmetic industries such as L'Oreal, since many brands are equally famous. Instead of writing that main opportunities of the company are overseas expansion and brand extension, it is crucial to replace it with a broader definition and explanation. The example of a more successful explanation could be: "Eastern European markets, with developing spending power and proven appetite for Western consumer brands, represent opportunity. 25% of existing sales in airport outlets are to customers travelling to these countries". Another example could involve: "Competing firms have extended brands to cosmetics, spectacles, jeans and stationery. Likely opportunity for this firm to follow suit" (Adams, 2005).
Instead of saying that the threat of a firm is in exchange rate fluctuations, the statements of: "Appreciation of euro versus dollar likely to lead to reduced value of US profits (25% of total)" or "This is a specific threat that affects this firm because of its high proportion of US sales" could be appropriate (De Witt and Meyer, 1998).
In order to write a good SWOT the following criteria must be taken into account:
Make your points long enough, and include enough detail, to make it plain why a particular factor is important, and why it can be considered as a strength, weakness, opportunity or threat. Include precise evidence, and cite figures, where possible.
Be as specific as you can about the precise nature of a firm's strength and weakness. Do not be content with general factors like economies of scale.
Avoid vague, general opportunities and threats that could be put forward for just about any organisation under any circumstances.
Do not mistake the outcomes of a strength (such as profits and market share) for strengths in their own right;
Improvement is not the same as strength - do not confuse the two;
Avoid contradicting yourself in the course of the analysis, by having strengths and weaknesses that are essentially different aspects of the same strategy of resource. Come to a reasoned conclusion about whether the good points outweigh the bad ones, or vice versa.
Where to Find Information for SWOT Analysis
Students when finding the essential information for conducting SWOT analysis, would have to look at company's business reports, annual reviews, published performance data on financial resources, marketing and operations, including current suppliers and key stakeholders groups.
It can also be helpful to search various journals on marketing, strategy and human resources to find out more published and referenced information on the company's past experience, its current position and future objectives.
SWOT Analysis Limitations
A key element of strategic option formulation is the matching of organizational strengths and weaknesses with opportunities and threats which exist in the marketplace. SWOT analysis is widely recognized in the marketing and strategic management literature as a systematic way of achieving this end. A number of critics however have claimed that the output from a SWOT analysis is often either trivial or so broad as to be relatively meaningless in the context of making actual marketing decisions. Mintzberg (1990), for example, states that the assessment of strengths and weaknesses may be unreliable, being bound up with aspirations, biases and hopes. Therefore, it is important for strengths and weaknesses to be defined in the context of a situation. As a consequence, a creative problem-solving tool such as brainstorming may thus be a useful help in overcoming this difficulty.
SWOT analysis can be used in many ways to aid strategic analysis. The most common way is to use it as a logical framework guiding systematic discussion of a firm's resources and the basic alternatives that emerge from this resource-based view. What one manager sees as an opportunity, another may see as a potential threat. Likewise, a strength to one manager can be a weakness to another. Different assessments may reflect underlying power considerations within the firm or differing factual perspectives. Systematic analysis of these issues facilitates objectives internal analysis (Hill and Westbrook, 1997; Markides, 1999). Understanding the key opportunities and threats facing a firm helps its managers identify realistic options from which to choose an appropriate strategy and clarifies the most effective niche for the firm.
One of the historical deficiencies of SWOT analysis was the tendency to rely on a very general, categorical assessment of internal capabilities. The resource-based view came to exist in part as a remedy to this void in the strategic management field. It is an excellent way to identify internal strengths and weaknesses and use that information to enhance the quality of a SWOT analysis. Similarly, value chain analysis identifies elements of a company's capabilities and operations that are useful in conducting a SWOT analysis.
Conclusion
SWOT helps a company to see itself for better and for worse. Companies are inherently insular and inward looking SWOTs are a means by which a company can better understand what it does very well and where its shortcomings are. SWOTs will help the company size up the competitive landscape and get some insight into the vagaries of the marketplace.
SWOT analysis has been a framework of choice among many managers for along time because of its simplicity and its portrayal of the essence of sound strategy formulation - matching a firm's opportunities and threats wit its strengths and weaknesses. Central to making SWOT analysis effective is accurate internal analysis - the identification of specific strengths and weaknesses around which sound strategy can be built.
If you found this article useful please have a look at the other articles we have written: PEST analysis, Porter's 5 Forces analysis, Ansoff analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, BALANCED SCORECARD, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework and Product Life Cycle.
References
Adams, J. (2005) Analyze Your Company Using SWOTs, Supply House Times, Vol. 48 Issue 7, pp. 26-28.
De Witt, B. and Meyer, R. (1998) Strategy: Process, Content, Context, 2nd ed., Oxford: International Thompson Business Press.
Hill, T. and Westbrook, R. (1997) SWOT Analysis: It's Time for a Product Recall, Long Range Planning, Vol. 30 Issue 1, pp.13-16.
Markides, C. (1999) Six Principles of Breakthrough Strategy, Business Strategy Review, July-August, pp.30-34.
Mintzberg, H. (1990) The Design School: Reconsidering the Basic Premises of Strategic Management, Strategic Management Journal, Vol. 11 pp.171-195.
Thompson, J. (2002) Strategic Management, 4th Edition, London: Thomson.
Weihrich, H. (1982) The TOWS matrix: a tool for situational analysis, Journal of Long Range Planning, Vol. 15 Issue 2, pp.12-14.
Bibliography
Ames, M. and Runco, M. (2005) Predicting Entrepreneurship From Ideation and Divergent Thinking, Creativity & Innovation Management, Vol. 14 Issue 3, pp.311-315.
Hogarth, R. and Makridakis, S. (1981) Forecasting and Planning: An Evaluation, Management Science, 27, pp.115-138.
Kay, J. (1993) Foundations of Corporate Success, Oxford: Oxford University Press.
Mintzberg, H. (1987) Crafting Strategy, Harvard Business Review, November-December, pp.21-25.
Pearce, J. and Robinson, R (2005) Strategic Management, 9th Edition, New York: McGraw-Hill.
Whittington, R. (1993) What is Strategy - and Does it Matter?, Oxford: International Thompson Business Press.
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Saturday, July 30, 2011
McKinsey’s 7S Framework
The following information is used for educational purposes only.
McKinsey’s 7S Framework
There may be a role for using ‘McKinsey’s 7S Framework’ in helping a unit structure the analysis. The constituent parts of the 7S Model are:
• Strategy: plan or course of action leading to the allocation of the unit’s finite resources to reach identified goals
• Structure: salient features of the unit’s organisational chart (e.g. degree of hierarchy, presence of internal market, extent of centralization/decentralization) and interconnections within the office
• Systems: procedures and routine processes, including how information moves around the unit and within UCC
• Staff: personnel categories within the unit and the use to which staff are put, skill base, etc.
• Style: characterization of how key managers behave in order to achieve the unit’s goals
• Shared values: the significant meanings or guiding concepts that the unit imbues on its members
• Skills: distinctive capabilities of key personnel and the unit as a whole The 7S model can be used in two ways:
• Considering the links between each of the Ss can identify strengths and weaknesses of an organisation. No S is strength or a weakness in its own right; it is only its degree of support, or otherwise, for the other Ss which is relevant. Any Ss that harmonise with all the other Ss can be thought of as strengths and weaknesses.
• The model highlights how a change made in any one of the Ss will have an impact on all the others. Thus if a planned change is to be effective, then changes in one S must be accompanied by complementary changes in the others.
A final thought. It may be interesting to note that back in the early 1980, using the 7S model, Peters and Waterman identified eight features common to excellent performance. How does the unit measure against these simple measures?
• A bias for action: a propensity to act, even in the light of incomplete information, rather than to engage in extensive discussion and analysis
• Close to the customer: listening to, learning from, and providing exemplary service for their customers
• Autonomy and entrepreneurship: fostering leaders and innovators throughout the organisation/department; encouraging practical risk taking and tolerating failure
• Productivity through people: respect for and validation of staff; recognition that staff are the source of quality and productivity gain
• Hands-on, value driven: led by executives that are ‘in touch’ with the essential aspects of the organisation; paying explicit attention to promulgating the organisations core values
• Stick to the knitting: operating primarily in fields of established expertise
• Simple form, lean staff: characterised by few administrative layers, and uncomplicated systems
• Simultaneous loose tight properties: a combination of centralisation and decentralisation; promoting
© Copyright for this article belongs to University College Cork
Source of the article: http://www.ucc.ie/quality/INTERNET/PESTAnalysis.pdf
This article comes from UK Student Portal
http://www.uk-student.net
McKinsey’s 7S Framework
There may be a role for using ‘McKinsey’s 7S Framework’ in helping a unit structure the analysis. The constituent parts of the 7S Model are:
• Strategy: plan or course of action leading to the allocation of the unit’s finite resources to reach identified goals
• Structure: salient features of the unit’s organisational chart (e.g. degree of hierarchy, presence of internal market, extent of centralization/decentralization) and interconnections within the office
• Systems: procedures and routine processes, including how information moves around the unit and within UCC
• Staff: personnel categories within the unit and the use to which staff are put, skill base, etc.
• Style: characterization of how key managers behave in order to achieve the unit’s goals
• Shared values: the significant meanings or guiding concepts that the unit imbues on its members
• Skills: distinctive capabilities of key personnel and the unit as a whole The 7S model can be used in two ways:
• Considering the links between each of the Ss can identify strengths and weaknesses of an organisation. No S is strength or a weakness in its own right; it is only its degree of support, or otherwise, for the other Ss which is relevant. Any Ss that harmonise with all the other Ss can be thought of as strengths and weaknesses.
• The model highlights how a change made in any one of the Ss will have an impact on all the others. Thus if a planned change is to be effective, then changes in one S must be accompanied by complementary changes in the others.
A final thought. It may be interesting to note that back in the early 1980, using the 7S model, Peters and Waterman identified eight features common to excellent performance. How does the unit measure against these simple measures?
• A bias for action: a propensity to act, even in the light of incomplete information, rather than to engage in extensive discussion and analysis
• Close to the customer: listening to, learning from, and providing exemplary service for their customers
• Autonomy and entrepreneurship: fostering leaders and innovators throughout the organisation/department; encouraging practical risk taking and tolerating failure
• Productivity through people: respect for and validation of staff; recognition that staff are the source of quality and productivity gain
• Hands-on, value driven: led by executives that are ‘in touch’ with the essential aspects of the organisation; paying explicit attention to promulgating the organisations core values
• Stick to the knitting: operating primarily in fields of established expertise
• Simple form, lean staff: characterised by few administrative layers, and uncomplicated systems
• Simultaneous loose tight properties: a combination of centralisation and decentralisation; promoting
© Copyright for this article belongs to University College Cork
Source of the article: http://www.ucc.ie/quality/INTERNET/PESTAnalysis.pdf
This article comes from UK Student Portal
http://www.uk-student.net
What is PEST analysis?
The following information is used for educational purposes only.
What is PEST analysis? What are the main aspects of PEST analysis? How to write Good PEST analysis of a company? Where to find information for PEST analysis? PEST Analysis Examples; Reports on Different Companies
PEST analysis is also known as: STEP, PESTEL, PESTLE, PESTE, PESTLIED, SLEPT, STEEPLE, STEEPLED, LE PEST C and LEPEST analysis.
Introduction
In analyzing the macro-environment, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence the organization’s supply and demand levels and its costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). The "radical and ongoing changes occurring in society create an uncertain environment and have an impact on the function of the whole organization" (Tsiakkiros, 2002). A number of checklists have been developed as ways of cataloguing the vast number of possible issues that might affect an industry. A PEST analysis is one of them that is merely a framework that categorizes environmental influences as political, economic, social and technological forces. Sometimes two additional factors, environmental and legal, will be added to make a PESTEL analysis, but these themes can easily be subsumed in the others. The analysis examines the impact of each of these factors (and their interplay with each other) on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats when preparing business and strategic plans (Byars, 1991; Cooper, 2000).
Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. The headings of PEST are a framework for reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models, be applied by companies to review a strategic directions, including marketing proposition. The use of PEST analysis can be seen effective for business and strategic planning, marketing planning, business and product development and research reports. PEST also ensures that company’s performance is aligned positively with the powerful forces of change that are affecting business environment (Porter, 1985). PEST is useful when a company decides to enter its business operations into new markets and new countries. The use of PEST, in this case, helps to break free of unconscious assumptions, and help to effectively adapt to the realities of the new environment.
Main Aspects of PEST Analysis
Economic conditions affect how easy or how difficult it is to be successful and profitable at any time because they affect both capital availability and cost, and demand (Thompson, 2002). If demand is buyout, for example, and the cost of capital is low, it will be attractive for firms to invest and grow with expectations of being profitable. In opposite circumstances firms might find that profitability throughout the industry is low. The timing and relative success of particular strategies can be influences by economic conditions. When the economy, as a whole or certain sectors of the economy, are growing, demand may exist for a product or service which would not be in demand in more depressed circumstances. Similarity, the opportunity to exploit a particular strategy successfully may depend on demand which exists in growth conditions and does not in recession. Although a depressed economy will generally be a treat which results in a number of organizations going out of business, it can provide opportunities for some (Robinson and et al., 1978; Thompson, 2002).
Economic conditions are influenced by political and government policy, being a major influence affecting government decisions. The issue of whether European countries join, or remain outside, the single European currency is a case in point. At any one time either exported or imported goods can seem expensive or inexpensive, dependent upon currency exchange rates. There are many other ways, however, in which government decisions will affect organizations both directly and indirectly, as they provide both opportunities and threats.
While economic conditions and government policy are closely related, they both influence a number of other environmental forces that can affect organizations. Capital markets determine the conditions for alternative types of funding for organizations. They tend to be a subject to government controls, and they will be guided by the prevailing economic conditions. The rate of interest charged for loans will be affected by inflation and by international economics and, although the determining rate may be fixed by a central bank, as it is the case with the Bank of England, that will also be influenced by stated government priorities. According to Thompson (2002), government spending can increase the money supply and make capital markets more buoyant. The expectations of shareholders with regard to company performance, their willingness to provide more equity funding or their willingness to sell their shares will also be affected.
The labour market reflects the availability of particular skills at national and regional levels; this is affected by training, which is influenced by government and other regional agencies. Labour costs will be influenced by inflation and by general trends in other industries, and by the role ad power of trade unions.
The sociocultural environment encapsulates demand and tastes, which vary with fashion, disposable income, and general changes, can again provide both opportunities and threats for particular companies (Thompson, 2002; Pearce and Robinson, 2005). Over-time most products change from being a novelty to a situation of market saturation, and as this happens pricing and promotion strategies have to change. Similarly, some products and services will sell around the world with little variation, but these are relatively unusual. Organizations should be aware of demographics changes as the structure of the population by ages, affluence, regions, numbers working and so on can have an important bearing on demand as a whole and on demand for particular products and services. Threats to existing products might be increasing: opportunities for differentiation and market segmentation might be emerging.
Technology is widely recognised by various literature on strategic management (Capron and Glazer, 1987; Johnson and Scholes, 1993; Jan, 2002), as part of the organization and the industry part of the model as it is used for the creation of competitive advantage. However, technology external to the industry can also be captured and used, and this again can be influenced by government support and encouragement. Technological breakthroughs can create new industries which might prove a threat to existing organizations whose products or services might be rendered redundant, and those firms which might be affected in this way should be alert to the possibility. Equally, new technology could provide a useful input, in both manufacturing and service industries, but in turn its purchase will require funding and possibly employee training before it can be used.
How to Write a Good PEST Analysis
As it was discussed above, PEST analysis incorporates four perspectives, which give a logical structure, providing clear presentation for further discussions and proactive decision-makings. In writing a good PEST, subject should be a clear definition of the market being addressed, which might include the following issues of:
a company looking at its market
a product looking at its market
a brand in relation to its market
a local business unit
a strategic option, such as entering a new market or launching a new product
a potential acquisition
a potential partnership
an investment opportunity
It is crucial to describe the subject for the PEST analysis clearly so that people, contributing to the analysis, and those interpreting the results from PEST analysis, could understand the purpose of the PEST assessment and its implications (Jan, 2002).
Before producing a good PEST analysis, it is of primary importance to, firstly, brainstorm the relevant factors that apply to the company or to its business environment. Second requirement is to identify the information that applies to these factors; and thirdly, to draw conclusions from this information. It is, however, necessary not only to describe factors, but to think through what they mean and how they impact the business. PEST analysis is only a strategic starting point, and has its own limitations, emphasizing the need to test the conclusions and findings against the reality.
In conducting PEST analysis, it is required to consider each PEST factor as they all play a part in determining the overall business environment. Some examples of topics include the following:
Political: (includes legal and regulatory): elections, employment law, consumer protection, environmental regulations, industry-specific regulations, competitive regulations, inter-country relationships/attitudes, war, terrorism, political trends, governmental leadership, taxes, and government structures.
Economic: economic growth trends (various countries), taxation, government spending levels, disposable income, job growth/unemployment, exchange rates, tariffs, inflation, consumer confidence index, import/export ratios, and production levels.
Social: demographics (age, gender, race, family size, etc.), lifestyle changes, population shifts, education, trends, fads, diversity, immigration/emigration, health, living standards, housing trends, fashion, attitudes to work, leisure activities, occupations, and earning capacity.
Technological: inventions, new discoveries, research, energy uses/sources/fuels, communications, rates of obsolescence, health (pharmaceutical, equipment, etc.), manufacturing advances, information technology, internet, transportation, bio-tech, genetics, agri-tech, waste removal/recycling, and so on.
After the key trends have been identified, the next step is to analyze the potential each trend has to disrupt the way the company does business. The company is able to determine the changes needed to exploit the opportunities, and blunt the threats (Pearce and Robinson, 2005).
When carrying out a PEST analysis it is important to show how and how much the factors that the firm picks out influence the nature of competition. It is this appraisal of the impact of each factor that distinguishes an analysis from a mere list. A common error is to try and devise a single analysis to try and cover the entire history of a firm and an industry. Therefore, the company must keep the analysis of past developments separate from that of the present situation and future trends. When analyzing PEST factors in the present, it is required to make it plain why the present is different from the past, and how the industry may need to change. There is no need to agonise too long over whether a particular item is political, economic, social and technological in nature. Many important factors transcend the simple PEST categories. The advent of the microprocessor is a technological event that has had a broad economic and social impact. The "green" movement my have started as a social-cultural phenomenon, but it has been translated into legislation and has stimulated technological change (Byars, 1991). It is perfectly legitimate when using a checklist like PEST to leave some categories empty. If there are no important political/legal influences on a particular industry, those conducting PEST analysis do not need to waste time trying to find factors that do not exist. There should be a limit to relevant factors.
Thompson (2002) states that for any organization certain environmental influences will constitute powerful forces which affect decision making significantly. For some manufacturing and service businesses the most powerful force will be customers; for other it may be competition. In some situations suppliers can be crucial. In the case of some small businesses external forces can dictate whether the business stays solvent or not. A major problem for these businesses concerns the management of cash flow, being able to pay bills when they are due for payment and being strong enough to persuade customers to pay their invoices on time.
Finding Information for PEST Analysis
To understand what kind of environment the company may compete in the near future, it requires understanding of the forces that will shape the change. For a PEST analysis, that means conducting a scan of the external events outside of the company, such as potential regulatory issues, demographic trends, political upheaval, and cutting-edge technology that could move mainstream. In conducting the analysis it may be essential to look at periodicals, analyst reports, demographics, and anything that will give the exposure to new trends and possibilities. Any reliable secondary data source of current events and projected future trends will provide information for the PEST analysis, including:
Newspapers, periodicals, current books
Trade organizations
Government agencies
Industry analysts
Financial analysts
One of the potential disadvantages collecting from the secondary sources is derived from issues of validity, reliability and relevance. The limitation could be apparent in the nature of market forces that reduce the applicability of the information sources to present situations. The problem could arise based on the past data and past events being collected within past environmental conditions. Therefore, the data has to be checked and applied to the current business conditions.
Conclusion
PEST analysis looks at the external business environment and is an appropriate strategic tool for understanding the "big picture" of the environment in which business operates, enabling the company to take advantage of the opportunities and minimize the threats faced by thier business activities. When strategic planning is done correctly, it provides a solid plan for a company to grow into the future.
With a PEST analysis, the company can see a longer horizon of time, and be able to clarify strategic opportunities and threats that the organisation faces. By looking to the outside environment to see the potential forces of change looming on the horizon, firms can take the strategic planning process out of the arena of today and into the horizon of tomorrow.
PEST is not a set of rigid compartments into which ideas need to be sorted. It is better thought of as a set of hooks that can be used to fish for important facts. Once the factors have been "fished out", it does not matter which hook they were attached to. When it comes to writing up the analysis, there is no need to mention the PEST labels at all.
If you found this article useful please have a look at the other articles we have written: Ansoff analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, BALANCED SCORECARD, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework and Product Life Cycle.
References
Byars, L. (1991) Strategic Management, Formulation and Implementation – Concepts and Cases, New York: HarperCollins.
Jan, Y. (2002) A three-step matrix method for strategic marketing management, Marketing Intelligence and Planning, Vol. 20 Issue 5, pp.269-272.
Johnson, G. and Scholes, K. (1993) Exploring Corporate Strategy – Text and Cases, Hemel Hempstead: Prentice-Hall.
Kotter, J. and Schlesinger, L. (1991) Choosing strategies for change, Harvard Business Review, pp.24-29.
Capron, N. and Glazer, R. (1987) Marketing and technology: a strategic coalignment, Journal of Marketing, Vol. 51 Issue 3, pp.10-21.
Cooper, L. (2000) Strategic marketing planning for radically new products, Journal of Marketing, Vol. 64 Issue 1, pp.1-15.
Kotler, P. (1998) Marketing Management – Analysis, Planning, Implementation, and Control, 9th Edition, Englewood Cliffs: Prentice-Hall.
Pearce, J. and Robinson, R (2005) Strategic Management, 9th Edition, New York: McGraw-Hill.
Porter, M. (1985) Competitive Advantage, New York: Free Press.
Robinson, S., Hichens, R. and Wade, D. (1978) The directional policy matrix-tool for strategic planning, Long Range Planning Journal, Vol. 11, pp.8-15.
Thompson, J. (2002) Strategic Management, 4th Edition, London: Thomson.
Tsiakkiros A (2002) "Strategic planning and education: The case of Cyprus", The International Journal of Educational Management Bradford 2002
Copyright 2002-2009 Papers4You.Com All Rights Reserved
What is PEST analysis? What are the main aspects of PEST analysis? How to write Good PEST analysis of a company? Where to find information for PEST analysis? PEST Analysis Examples; Reports on Different Companies
PEST analysis is also known as: STEP, PESTEL, PESTLE, PESTE, PESTLIED, SLEPT, STEEPLE, STEEPLED, LE PEST C and LEPEST analysis.
Introduction
In analyzing the macro-environment, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence the organization’s supply and demand levels and its costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). The "radical and ongoing changes occurring in society create an uncertain environment and have an impact on the function of the whole organization" (Tsiakkiros, 2002). A number of checklists have been developed as ways of cataloguing the vast number of possible issues that might affect an industry. A PEST analysis is one of them that is merely a framework that categorizes environmental influences as political, economic, social and technological forces. Sometimes two additional factors, environmental and legal, will be added to make a PESTEL analysis, but these themes can easily be subsumed in the others. The analysis examines the impact of each of these factors (and their interplay with each other) on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats when preparing business and strategic plans (Byars, 1991; Cooper, 2000).
Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. The headings of PEST are a framework for reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models, be applied by companies to review a strategic directions, including marketing proposition. The use of PEST analysis can be seen effective for business and strategic planning, marketing planning, business and product development and research reports. PEST also ensures that company’s performance is aligned positively with the powerful forces of change that are affecting business environment (Porter, 1985). PEST is useful when a company decides to enter its business operations into new markets and new countries. The use of PEST, in this case, helps to break free of unconscious assumptions, and help to effectively adapt to the realities of the new environment.
Main Aspects of PEST Analysis
Economic conditions affect how easy or how difficult it is to be successful and profitable at any time because they affect both capital availability and cost, and demand (Thompson, 2002). If demand is buyout, for example, and the cost of capital is low, it will be attractive for firms to invest and grow with expectations of being profitable. In opposite circumstances firms might find that profitability throughout the industry is low. The timing and relative success of particular strategies can be influences by economic conditions. When the economy, as a whole or certain sectors of the economy, are growing, demand may exist for a product or service which would not be in demand in more depressed circumstances. Similarity, the opportunity to exploit a particular strategy successfully may depend on demand which exists in growth conditions and does not in recession. Although a depressed economy will generally be a treat which results in a number of organizations going out of business, it can provide opportunities for some (Robinson and et al., 1978; Thompson, 2002).
Economic conditions are influenced by political and government policy, being a major influence affecting government decisions. The issue of whether European countries join, or remain outside, the single European currency is a case in point. At any one time either exported or imported goods can seem expensive or inexpensive, dependent upon currency exchange rates. There are many other ways, however, in which government decisions will affect organizations both directly and indirectly, as they provide both opportunities and threats.
While economic conditions and government policy are closely related, they both influence a number of other environmental forces that can affect organizations. Capital markets determine the conditions for alternative types of funding for organizations. They tend to be a subject to government controls, and they will be guided by the prevailing economic conditions. The rate of interest charged for loans will be affected by inflation and by international economics and, although the determining rate may be fixed by a central bank, as it is the case with the Bank of England, that will also be influenced by stated government priorities. According to Thompson (2002), government spending can increase the money supply and make capital markets more buoyant. The expectations of shareholders with regard to company performance, their willingness to provide more equity funding or their willingness to sell their shares will also be affected.
The labour market reflects the availability of particular skills at national and regional levels; this is affected by training, which is influenced by government and other regional agencies. Labour costs will be influenced by inflation and by general trends in other industries, and by the role ad power of trade unions.
The sociocultural environment encapsulates demand and tastes, which vary with fashion, disposable income, and general changes, can again provide both opportunities and threats for particular companies (Thompson, 2002; Pearce and Robinson, 2005). Over-time most products change from being a novelty to a situation of market saturation, and as this happens pricing and promotion strategies have to change. Similarly, some products and services will sell around the world with little variation, but these are relatively unusual. Organizations should be aware of demographics changes as the structure of the population by ages, affluence, regions, numbers working and so on can have an important bearing on demand as a whole and on demand for particular products and services. Threats to existing products might be increasing: opportunities for differentiation and market segmentation might be emerging.
Technology is widely recognised by various literature on strategic management (Capron and Glazer, 1987; Johnson and Scholes, 1993; Jan, 2002), as part of the organization and the industry part of the model as it is used for the creation of competitive advantage. However, technology external to the industry can also be captured and used, and this again can be influenced by government support and encouragement. Technological breakthroughs can create new industries which might prove a threat to existing organizations whose products or services might be rendered redundant, and those firms which might be affected in this way should be alert to the possibility. Equally, new technology could provide a useful input, in both manufacturing and service industries, but in turn its purchase will require funding and possibly employee training before it can be used.
How to Write a Good PEST Analysis
As it was discussed above, PEST analysis incorporates four perspectives, which give a logical structure, providing clear presentation for further discussions and proactive decision-makings. In writing a good PEST, subject should be a clear definition of the market being addressed, which might include the following issues of:
a company looking at its market
a product looking at its market
a brand in relation to its market
a local business unit
a strategic option, such as entering a new market or launching a new product
a potential acquisition
a potential partnership
an investment opportunity
It is crucial to describe the subject for the PEST analysis clearly so that people, contributing to the analysis, and those interpreting the results from PEST analysis, could understand the purpose of the PEST assessment and its implications (Jan, 2002).
Before producing a good PEST analysis, it is of primary importance to, firstly, brainstorm the relevant factors that apply to the company or to its business environment. Second requirement is to identify the information that applies to these factors; and thirdly, to draw conclusions from this information. It is, however, necessary not only to describe factors, but to think through what they mean and how they impact the business. PEST analysis is only a strategic starting point, and has its own limitations, emphasizing the need to test the conclusions and findings against the reality.
In conducting PEST analysis, it is required to consider each PEST factor as they all play a part in determining the overall business environment. Some examples of topics include the following:
Political: (includes legal and regulatory): elections, employment law, consumer protection, environmental regulations, industry-specific regulations, competitive regulations, inter-country relationships/attitudes, war, terrorism, political trends, governmental leadership, taxes, and government structures.
Economic: economic growth trends (various countries), taxation, government spending levels, disposable income, job growth/unemployment, exchange rates, tariffs, inflation, consumer confidence index, import/export ratios, and production levels.
Social: demographics (age, gender, race, family size, etc.), lifestyle changes, population shifts, education, trends, fads, diversity, immigration/emigration, health, living standards, housing trends, fashion, attitudes to work, leisure activities, occupations, and earning capacity.
Technological: inventions, new discoveries, research, energy uses/sources/fuels, communications, rates of obsolescence, health (pharmaceutical, equipment, etc.), manufacturing advances, information technology, internet, transportation, bio-tech, genetics, agri-tech, waste removal/recycling, and so on.
After the key trends have been identified, the next step is to analyze the potential each trend has to disrupt the way the company does business. The company is able to determine the changes needed to exploit the opportunities, and blunt the threats (Pearce and Robinson, 2005).
When carrying out a PEST analysis it is important to show how and how much the factors that the firm picks out influence the nature of competition. It is this appraisal of the impact of each factor that distinguishes an analysis from a mere list. A common error is to try and devise a single analysis to try and cover the entire history of a firm and an industry. Therefore, the company must keep the analysis of past developments separate from that of the present situation and future trends. When analyzing PEST factors in the present, it is required to make it plain why the present is different from the past, and how the industry may need to change. There is no need to agonise too long over whether a particular item is political, economic, social and technological in nature. Many important factors transcend the simple PEST categories. The advent of the microprocessor is a technological event that has had a broad economic and social impact. The "green" movement my have started as a social-cultural phenomenon, but it has been translated into legislation and has stimulated technological change (Byars, 1991). It is perfectly legitimate when using a checklist like PEST to leave some categories empty. If there are no important political/legal influences on a particular industry, those conducting PEST analysis do not need to waste time trying to find factors that do not exist. There should be a limit to relevant factors.
Thompson (2002) states that for any organization certain environmental influences will constitute powerful forces which affect decision making significantly. For some manufacturing and service businesses the most powerful force will be customers; for other it may be competition. In some situations suppliers can be crucial. In the case of some small businesses external forces can dictate whether the business stays solvent or not. A major problem for these businesses concerns the management of cash flow, being able to pay bills when they are due for payment and being strong enough to persuade customers to pay their invoices on time.
Finding Information for PEST Analysis
To understand what kind of environment the company may compete in the near future, it requires understanding of the forces that will shape the change. For a PEST analysis, that means conducting a scan of the external events outside of the company, such as potential regulatory issues, demographic trends, political upheaval, and cutting-edge technology that could move mainstream. In conducting the analysis it may be essential to look at periodicals, analyst reports, demographics, and anything that will give the exposure to new trends and possibilities. Any reliable secondary data source of current events and projected future trends will provide information for the PEST analysis, including:
Newspapers, periodicals, current books
Trade organizations
Government agencies
Industry analysts
Financial analysts
One of the potential disadvantages collecting from the secondary sources is derived from issues of validity, reliability and relevance. The limitation could be apparent in the nature of market forces that reduce the applicability of the information sources to present situations. The problem could arise based on the past data and past events being collected within past environmental conditions. Therefore, the data has to be checked and applied to the current business conditions.
Conclusion
PEST analysis looks at the external business environment and is an appropriate strategic tool for understanding the "big picture" of the environment in which business operates, enabling the company to take advantage of the opportunities and minimize the threats faced by thier business activities. When strategic planning is done correctly, it provides a solid plan for a company to grow into the future.
With a PEST analysis, the company can see a longer horizon of time, and be able to clarify strategic opportunities and threats that the organisation faces. By looking to the outside environment to see the potential forces of change looming on the horizon, firms can take the strategic planning process out of the arena of today and into the horizon of tomorrow.
PEST is not a set of rigid compartments into which ideas need to be sorted. It is better thought of as a set of hooks that can be used to fish for important facts. Once the factors have been "fished out", it does not matter which hook they were attached to. When it comes to writing up the analysis, there is no need to mention the PEST labels at all.
If you found this article useful please have a look at the other articles we have written: Ansoff analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, BALANCED SCORECARD, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework and Product Life Cycle.
References
Byars, L. (1991) Strategic Management, Formulation and Implementation – Concepts and Cases, New York: HarperCollins.
Jan, Y. (2002) A three-step matrix method for strategic marketing management, Marketing Intelligence and Planning, Vol. 20 Issue 5, pp.269-272.
Johnson, G. and Scholes, K. (1993) Exploring Corporate Strategy – Text and Cases, Hemel Hempstead: Prentice-Hall.
Kotter, J. and Schlesinger, L. (1991) Choosing strategies for change, Harvard Business Review, pp.24-29.
Capron, N. and Glazer, R. (1987) Marketing and technology: a strategic coalignment, Journal of Marketing, Vol. 51 Issue 3, pp.10-21.
Cooper, L. (2000) Strategic marketing planning for radically new products, Journal of Marketing, Vol. 64 Issue 1, pp.1-15.
Kotler, P. (1998) Marketing Management – Analysis, Planning, Implementation, and Control, 9th Edition, Englewood Cliffs: Prentice-Hall.
Pearce, J. and Robinson, R (2005) Strategic Management, 9th Edition, New York: McGraw-Hill.
Porter, M. (1985) Competitive Advantage, New York: Free Press.
Robinson, S., Hichens, R. and Wade, D. (1978) The directional policy matrix-tool for strategic planning, Long Range Planning Journal, Vol. 11, pp.8-15.
Thompson, J. (2002) Strategic Management, 4th Edition, London: Thomson.
Tsiakkiros A (2002) "Strategic planning and education: The case of Cyprus", The International Journal of Educational Management Bradford 2002
Copyright 2002-2009 Papers4You.Com All Rights Reserved
What is Porter's 5 Forces analysis?
The following information is used for educational purposes only.
What is Porter's 5 Forces analysis? What is Porter's 5 Forces analysis? What are the main aspects of Porter's 5 Forces analysis? How to write Good Porter's 5 Forces analysis of a company? Where to find information for Porter's 5 Forces analysis? Porter's Five Forces Examples; Reports on Different Companies
Introduction
There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s (Porter, 1998) were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector (Thurlby, 1998).
As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry’s likely profitability is conducted in Porter’s five forces model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.
Main Aspects of Porter’s Five Forces Analysis
The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization’s behaviour in a competitive market. These include the following:
The rivalry between existing sellers in the market.
The power exerted by the customers in the market.
The impact of the suppliers on the sellers.
The potential threat of new sellers entering the market.
The threat of substitute products becoming available in the market.
Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998).
Force 1: The Degree of Rivalry
The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.
This force is located at the centre of the diagram;
Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry
Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
Economies of scale: for example, benefits associated with bulk purchasing;
Cost of entry: for example, investment into technology;
Distribution channels: for example, ease of access for competitors;
Cost advantages not related to the size of the company: for example, contacts and expertise;
Government legislations: for example, introduction of new laws might weaken company’s competitive position;
Differentiation: for example, a certain brand that cannot be copied (The Champagne)
Force 3: The Threat of Substitutes
The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs – that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves:
Product-for-product substitution (email for mail, fax); is based on the substitution of need;
Generic substitution (Video suppliers compete with travel companies);
Substitution that relates to something that people can do without (cigarettes, alcohol).
Force 4: Buyer Power
Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry (refer to the diagram). The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use.
This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores;
Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies;
Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.
Force 5: Supplier Power
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:
Where the switching costs are high (switching from one Internet provider to another);
High power of brands (McDonalds, British Airways, Tesco);
Possibility of forward integration of suppliers (Brewers buying bars);
Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).
The nature of competition in an industry is strongly affected by the suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete – the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the “Structure-Conduct-Performance” (SCP) model: the structure of an industry determines organizations’ competitive behaviour (conduct), which in turn determines their profitability (performance). In concentrated industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits, than in fragmented ones. However, as Haberberg and Rieple (2001) state, the histories and cultures of the firms in the industry also play a very important role in shaping competitive behaviour, and the predictions of the SCP model need to be modified accordingly.
How to write a Good Porter's 5 Forces analysis
The Porter’s Five Forces model is a simple tool that supports strategic understanding where power lies in a business situation. It also helps to understand both the strength of a firm’s current competitive position, and the strength of a position a company is looking to move into. Despite the fact that the Five Force framework focuses on business concerns rather than public policy, it also emphasizes extended competition for value rather than just competition among existing rivals, and the simplicity of its application inspired numerous companies as well as business schools to adopt its use (Wheelen and Hunger, 1998).
With a clear understanding of where power lies, it will enable a company to take fair advantage of its strengths, improve weaknesses, and avoid taking wrong steps. Therefore, to apply this planning tool effectively, it is important to understand the situation and to look at each of the forces individually.
In conducting an analysis of Porter’s Five Forces, it is required to brainstorm all relevant factors for the company’s market situation, and then check against the factors presented for each force in the diagram above. The next step is to highlight the key factors on a diagram, and summarize the size and the scale of the force on the diagram. It is suggested to use relevant signs, for instance, “+” and “-" to represent the forces moderately in company’s favour, or for a force strongly against.
After identifying favourable and unfavourable forces for the company’s performance and industry’s attractiveness, it is important to analyse the situation and examine the impacts of the forces. One of the critical comments made of the Five Forces framework is its static nature, whereas the competitive environment is changing turbulently. Are the five forces able to foresee industry expansion? Is it the corporate strategist's goal to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favour, or is the goal to become part of the ongoing commerce with the intention to produce innovative ideas that will expand the size of the industry? Is it true that the environment poses a threat to the organisation, leading to the consideration of suppliers and buyers as threats that need to be tackled, or does it offer the ground for a constitutive industry player co-operation?
By thinking through how each force affects a company, and by identifying the strength and direction of each force, it provides an opportunity to identify the strength of the position and the ability to make a sustained profit in the industry (Mind Tools, 2006).
Limitations of Porter’s Five Force Model
Porter’s model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminating when used to understand the balance of power in other situations.
Porter argues that five forces determine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing or advertising; but, he contends, it is important to look beyond one’s immediate competitors as there are other determinates of profitability. Specifically, there might be competition from substitute products or services. These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. An example would be plastic bottles, glass bottles, and cans for packaging soft drinks. There may also be the potential threat of new entrants, although some competitors will see this as an opportunity to strengthen their position in the market by ensuring, as far as they can, customer loyalty. Finally, it is important to appreciate that companies purchase from suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away through reduced margins, by forcing either cost increases or price decreases. This relates to the strategic option of vertical integration, when the company acquires, or merges with, a supplier or customer and thereby gains greater control over the chain of activities which leads from basic materials through to final consumption (Luffman and et al., 1996; Wheelen and Hunger, 1998).
It is important to be aware that this model has further limitations in today's market environment; as it assumes relatively static market structures. Based originally on the economic situation in the eighties with its strong competition and relatively stable market structures, it is not able to take into account new business models and the dynamism of the industries, such as technological innovations and dynamic market entrants from start-ups that will completely change business models within short times. For instance, the computer and software industry is often considered as being highly competitive. The industry structure is constantly being revolutionized by innovation that indicates Five Forces model being of limited value since it represents no more than snapshots of a moving picture. Therefore, it is not advisable to develop a strategy solely on the basis of Porter’s models (Kippenberger, 1998; Haberberg and Rieple, 2001), but to examine it in addition to other strategic frameworks of SWOT and PEST analysis.
Nevertheless, that does not mean that Porters theories became invalid. What needs to be done is to adopt the model with the knowledge of its limitations and to use it as part of a larger framework of management tools, techniques and theories. This approach, however, is advisable for the application of every business model (Recklies, 2001).
Porter's Six Forces model and its relationship to the standard Five Forces model
Porter’s Five Forces model actually has an extension referred to as Porter’s Six Forces model. It is considerably less popular than the Five Forces model as its acceptance has been less positive than the Five Forces model. The Six Forces model though is very similar to the Five Forces model with the only difference being the addition of the sixth force in the framework. This sixth force in the model is termed as the relative power of other stakeholders, and can refer to a number of other groups or entities, depending on the factor which has the greatest influence including:
• Complementors – One school of thought looks at the sixth force to be complementors, which are businesses offering complementary products to the sector in focus and being analysed (Grove 1996). The author states that these complementary businesses, as a sixth factor, affect the industry as changes in these businesses (such as new techniques, approaches or technologies) can impact on the dynamics between the industry and the complementors.
• The government – The sixth force in the framework can also be considered to be the government, and is included in the framework if it has potential to impact on all the other five forces (Gordon, 1997). Thus, the government can have direct impact on the industry as the sixth force, but can also have indirect impact or influence by affecting the other five forces, whether favourably or unfavourably.
• The public – Yet other viewpoints look at the public as the sixth force in the model, particularly if the public has a strong influence in the dynamics of the sector resulting in changes to the other forces or in the sector as a whole.
• Shareholders – This group can also be considered potentially as the sixth force. This is more important in recent years where shareholder activity has increased significantly in the boardroom, and management of firms has been scrutinised much more and even given ‘threats’ if certain actions favoured by the shareholders were not pursued.
• Employees – Employees could also be considered as the sixth force if they wielded extraordinarily strong influence on the firm in a particular sector. The status of employees seems to follow similar rules in certain sectors, and thus could be considered a strong influence in these sectors. For example, in the automobile sector in the US, a large part of the work force are unionised, and thus could be considered the sixth force instead of the government or complementors.
While a sixth force has been added to Porter’s original Five Forces model, the acceptance of this framework has been somewhat limited. This could be for two reasons. First, is that there is no definite and specific sixth force in all sectors, as it is different for each sector. Second, while a sixth force could be defined for all sectors, the influence of this factor can also be captured in the other five forces and thus the necessity of having it in the framework is less compelling.
Where to find information for Porter's 5 Forces analysis
In conducting the analysis it is crucial to examine the existing literature:
Periodicals, business articles on the industry performance, etc;
Analyst reports and trade organisations;
Company annual reports and its publications on the main suppliers and distribution network;
Anything that will give the exposure to the market situation, competitors present in the market, new emerging companies in the industry.
It is important to make sure that the sources are reliable and relevant to the current condition of the industry. It has to be viable, reliable and valid, in order to conduct a good analysis of the model. For this purpose, the gathered data and information has to be checked and be applied to the current business conditions. Further limitations could be present in the nature of market forces that reduce the applicability of the information sources to present situations; and the amount of detailed information required. This can be prohibitive to its practical use. For example, the level of competitor information required is very detailed and may not always be available.
Conclusion
Any company must seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and in establishing appropriate strategies. If a company fully understands the nature of the Porter’s five forces, and particularly appreciates which one is the most important, it will be in a stronger position to defend itself against any threats and to influence the forces with its strategy. The situation is fluid, and the nature and relative power of the forces will change. Consequently, the need to monitor and stay aware is continuous.
Some issues during the implementation of these Five Forces are crucially important for organizations to build long-term business strategy and sustaining competitive advantages rather than simply list the forces. Successful use of the Porter Model Analysis includes identifying the sources of competition, the strength and likelihood of that competition existing, and strategic recommendations for the action a company should take in order to develop barriers to competition.
If you found this article useful please have a look at the other articles we have written: Ansoff analysis, McKinsey 7S Framework, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, Pest Analysis, Balanced Scorecard, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix and Product Life Cycle.
References
Haberberg, A. and Rieple, A. (2001) The Strategic Management of Organizations, Essex: Pearson Education Limited.
Kippenberger, T. (1998) Strategy according to Michael Porter, The Antidote, Vol. 3 Issue 6, pp. 24-25.
Luffman, G., Lea, E., Sanderson, S. and Kenny, B. (1996) Strategic Management, Oxford: Blackwell Publishers Inc.
Porter, M. (1980a) How Competition Forces Shape Strategy, Harvard Business Review, September-October, pp.137-145.
Porter, M. (1980b) Competitive Strategy, New York: Free Press.
Porter, M. (1998) Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Free Press.
Sanderson, S. (1998) New approaches to strategy: new ways of thinking for the millennium, Management Decision, Vol. 36 issue 1, pp.9-13.
Thurlby B (1998) “Competitive forces are also subject to change”, Management Decision London
Wheelen, T. and Hunger, J. (1998) Strategic Management and Business Policy, 6th ed., Reading: Addison-Wesley.
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Ghemawat, P., Collis, D., Pisano, G. and Rivkin, J. (2001) Strategy and the Business Landscape: Core Concepts, Upper Saddle River: Pearson Education.
Gordon, P. J. 1997. Ten strategic audit questions. Business Horizons. [online]. 40 (5). Available from: http://www.factiva.com. [cited 9 December 2007].
Grove, A. 1996. Paradigms of paranoia every company will be confronted by external crises that revolutionise the rules of its business. How can CEOs identify these exigencies before it is too late? Business Today. [online]. [Published 22 November 1996]. Available from: http://www.factiva.com. [cited 9 December 2007].
O’Shaughnessy, N. (1996) Michael Porter’s revisited, Management Decision, Vol. 34 Issue 6, pp.12-20.
Porter, M. (1979) How competitive forces shape strategy, Harvard Business Review, Vol. 57 Issue 2, pp.5-8.
Scott-Morton, M. (Ed.) (1991) The Corporation of the Nineties, Oxford: OUP.
Wolpert, J. (2002) Breaking out of the innovation box, Harvard Business Review, pp.77-83.
http://www.mindtools.com/pages/Newsletters/20Jan05.htm
http://www.themanager.org/Strategy/BeyondPorter.htm
Copyright 2002-2009 Papers4You.Com All Rights Reserved
What is Porter's 5 Forces analysis? What is Porter's 5 Forces analysis? What are the main aspects of Porter's 5 Forces analysis? How to write Good Porter's 5 Forces analysis of a company? Where to find information for Porter's 5 Forces analysis? Porter's Five Forces Examples; Reports on Different Companies
Introduction
There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s (Porter, 1998) were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector (Thurlby, 1998).
As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry’s likely profitability is conducted in Porter’s five forces model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.
Main Aspects of Porter’s Five Forces Analysis
The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization’s behaviour in a competitive market. These include the following:
The rivalry between existing sellers in the market.
The power exerted by the customers in the market.
The impact of the suppliers on the sellers.
The potential threat of new sellers entering the market.
The threat of substitute products becoming available in the market.
Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998).
Force 1: The Degree of Rivalry
The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.
This force is located at the centre of the diagram;
Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry
Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
Economies of scale: for example, benefits associated with bulk purchasing;
Cost of entry: for example, investment into technology;
Distribution channels: for example, ease of access for competitors;
Cost advantages not related to the size of the company: for example, contacts and expertise;
Government legislations: for example, introduction of new laws might weaken company’s competitive position;
Differentiation: for example, a certain brand that cannot be copied (The Champagne)
Force 3: The Threat of Substitutes
The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs – that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves:
Product-for-product substitution (email for mail, fax); is based on the substitution of need;
Generic substitution (Video suppliers compete with travel companies);
Substitution that relates to something that people can do without (cigarettes, alcohol).
Force 4: Buyer Power
Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry (refer to the diagram). The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use.
This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores;
Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies;
Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.
Force 5: Supplier Power
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:
Where the switching costs are high (switching from one Internet provider to another);
High power of brands (McDonalds, British Airways, Tesco);
Possibility of forward integration of suppliers (Brewers buying bars);
Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).
The nature of competition in an industry is strongly affected by the suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete – the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the “Structure-Conduct-Performance” (SCP) model: the structure of an industry determines organizations’ competitive behaviour (conduct), which in turn determines their profitability (performance). In concentrated industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits, than in fragmented ones. However, as Haberberg and Rieple (2001) state, the histories and cultures of the firms in the industry also play a very important role in shaping competitive behaviour, and the predictions of the SCP model need to be modified accordingly.
How to write a Good Porter's 5 Forces analysis
The Porter’s Five Forces model is a simple tool that supports strategic understanding where power lies in a business situation. It also helps to understand both the strength of a firm’s current competitive position, and the strength of a position a company is looking to move into. Despite the fact that the Five Force framework focuses on business concerns rather than public policy, it also emphasizes extended competition for value rather than just competition among existing rivals, and the simplicity of its application inspired numerous companies as well as business schools to adopt its use (Wheelen and Hunger, 1998).
With a clear understanding of where power lies, it will enable a company to take fair advantage of its strengths, improve weaknesses, and avoid taking wrong steps. Therefore, to apply this planning tool effectively, it is important to understand the situation and to look at each of the forces individually.
In conducting an analysis of Porter’s Five Forces, it is required to brainstorm all relevant factors for the company’s market situation, and then check against the factors presented for each force in the diagram above. The next step is to highlight the key factors on a diagram, and summarize the size and the scale of the force on the diagram. It is suggested to use relevant signs, for instance, “+” and “-" to represent the forces moderately in company’s favour, or for a force strongly against.
After identifying favourable and unfavourable forces for the company’s performance and industry’s attractiveness, it is important to analyse the situation and examine the impacts of the forces. One of the critical comments made of the Five Forces framework is its static nature, whereas the competitive environment is changing turbulently. Are the five forces able to foresee industry expansion? Is it the corporate strategist's goal to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favour, or is the goal to become part of the ongoing commerce with the intention to produce innovative ideas that will expand the size of the industry? Is it true that the environment poses a threat to the organisation, leading to the consideration of suppliers and buyers as threats that need to be tackled, or does it offer the ground for a constitutive industry player co-operation?
By thinking through how each force affects a company, and by identifying the strength and direction of each force, it provides an opportunity to identify the strength of the position and the ability to make a sustained profit in the industry (Mind Tools, 2006).
Limitations of Porter’s Five Force Model
Porter’s model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminating when used to understand the balance of power in other situations.
Porter argues that five forces determine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing or advertising; but, he contends, it is important to look beyond one’s immediate competitors as there are other determinates of profitability. Specifically, there might be competition from substitute products or services. These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. An example would be plastic bottles, glass bottles, and cans for packaging soft drinks. There may also be the potential threat of new entrants, although some competitors will see this as an opportunity to strengthen their position in the market by ensuring, as far as they can, customer loyalty. Finally, it is important to appreciate that companies purchase from suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away through reduced margins, by forcing either cost increases or price decreases. This relates to the strategic option of vertical integration, when the company acquires, or merges with, a supplier or customer and thereby gains greater control over the chain of activities which leads from basic materials through to final consumption (Luffman and et al., 1996; Wheelen and Hunger, 1998).
It is important to be aware that this model has further limitations in today's market environment; as it assumes relatively static market structures. Based originally on the economic situation in the eighties with its strong competition and relatively stable market structures, it is not able to take into account new business models and the dynamism of the industries, such as technological innovations and dynamic market entrants from start-ups that will completely change business models within short times. For instance, the computer and software industry is often considered as being highly competitive. The industry structure is constantly being revolutionized by innovation that indicates Five Forces model being of limited value since it represents no more than snapshots of a moving picture. Therefore, it is not advisable to develop a strategy solely on the basis of Porter’s models (Kippenberger, 1998; Haberberg and Rieple, 2001), but to examine it in addition to other strategic frameworks of SWOT and PEST analysis.
Nevertheless, that does not mean that Porters theories became invalid. What needs to be done is to adopt the model with the knowledge of its limitations and to use it as part of a larger framework of management tools, techniques and theories. This approach, however, is advisable for the application of every business model (Recklies, 2001).
Porter's Six Forces model and its relationship to the standard Five Forces model
Porter’s Five Forces model actually has an extension referred to as Porter’s Six Forces model. It is considerably less popular than the Five Forces model as its acceptance has been less positive than the Five Forces model. The Six Forces model though is very similar to the Five Forces model with the only difference being the addition of the sixth force in the framework. This sixth force in the model is termed as the relative power of other stakeholders, and can refer to a number of other groups or entities, depending on the factor which has the greatest influence including:
• Complementors – One school of thought looks at the sixth force to be complementors, which are businesses offering complementary products to the sector in focus and being analysed (Grove 1996). The author states that these complementary businesses, as a sixth factor, affect the industry as changes in these businesses (such as new techniques, approaches or technologies) can impact on the dynamics between the industry and the complementors.
• The government – The sixth force in the framework can also be considered to be the government, and is included in the framework if it has potential to impact on all the other five forces (Gordon, 1997). Thus, the government can have direct impact on the industry as the sixth force, but can also have indirect impact or influence by affecting the other five forces, whether favourably or unfavourably.
• The public – Yet other viewpoints look at the public as the sixth force in the model, particularly if the public has a strong influence in the dynamics of the sector resulting in changes to the other forces or in the sector as a whole.
• Shareholders – This group can also be considered potentially as the sixth force. This is more important in recent years where shareholder activity has increased significantly in the boardroom, and management of firms has been scrutinised much more and even given ‘threats’ if certain actions favoured by the shareholders were not pursued.
• Employees – Employees could also be considered as the sixth force if they wielded extraordinarily strong influence on the firm in a particular sector. The status of employees seems to follow similar rules in certain sectors, and thus could be considered a strong influence in these sectors. For example, in the automobile sector in the US, a large part of the work force are unionised, and thus could be considered the sixth force instead of the government or complementors.
While a sixth force has been added to Porter’s original Five Forces model, the acceptance of this framework has been somewhat limited. This could be for two reasons. First, is that there is no definite and specific sixth force in all sectors, as it is different for each sector. Second, while a sixth force could be defined for all sectors, the influence of this factor can also be captured in the other five forces and thus the necessity of having it in the framework is less compelling.
Where to find information for Porter's 5 Forces analysis
In conducting the analysis it is crucial to examine the existing literature:
Periodicals, business articles on the industry performance, etc;
Analyst reports and trade organisations;
Company annual reports and its publications on the main suppliers and distribution network;
Anything that will give the exposure to the market situation, competitors present in the market, new emerging companies in the industry.
It is important to make sure that the sources are reliable and relevant to the current condition of the industry. It has to be viable, reliable and valid, in order to conduct a good analysis of the model. For this purpose, the gathered data and information has to be checked and be applied to the current business conditions. Further limitations could be present in the nature of market forces that reduce the applicability of the information sources to present situations; and the amount of detailed information required. This can be prohibitive to its practical use. For example, the level of competitor information required is very detailed and may not always be available.
Conclusion
Any company must seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and in establishing appropriate strategies. If a company fully understands the nature of the Porter’s five forces, and particularly appreciates which one is the most important, it will be in a stronger position to defend itself against any threats and to influence the forces with its strategy. The situation is fluid, and the nature and relative power of the forces will change. Consequently, the need to monitor and stay aware is continuous.
Some issues during the implementation of these Five Forces are crucially important for organizations to build long-term business strategy and sustaining competitive advantages rather than simply list the forces. Successful use of the Porter Model Analysis includes identifying the sources of competition, the strength and likelihood of that competition existing, and strategic recommendations for the action a company should take in order to develop barriers to competition.
If you found this article useful please have a look at the other articles we have written: Ansoff analysis, McKinsey 7S Framework, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, Pest Analysis, Balanced Scorecard, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix and Product Life Cycle.
References
Haberberg, A. and Rieple, A. (2001) The Strategic Management of Organizations, Essex: Pearson Education Limited.
Kippenberger, T. (1998) Strategy according to Michael Porter, The Antidote, Vol. 3 Issue 6, pp. 24-25.
Luffman, G., Lea, E., Sanderson, S. and Kenny, B. (1996) Strategic Management, Oxford: Blackwell Publishers Inc.
Porter, M. (1980a) How Competition Forces Shape Strategy, Harvard Business Review, September-October, pp.137-145.
Porter, M. (1980b) Competitive Strategy, New York: Free Press.
Porter, M. (1998) Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Free Press.
Sanderson, S. (1998) New approaches to strategy: new ways of thinking for the millennium, Management Decision, Vol. 36 issue 1, pp.9-13.
Thurlby B (1998) “Competitive forces are also subject to change”, Management Decision London
Wheelen, T. and Hunger, J. (1998) Strategic Management and Business Policy, 6th ed., Reading: Addison-Wesley.
Bibliography
Baker, M. (1992) Marketing Strategy and Management, London: Macmillan.
Freeman, R. (1984) Strategic Management: A Stakeholder Approach, Boston: Pitman.
Ghemawat, P., Collis, D., Pisano, G. and Rivkin, J. (2001) Strategy and the Business Landscape: Core Concepts, Upper Saddle River: Pearson Education.
Gordon, P. J. 1997. Ten strategic audit questions. Business Horizons. [online]. 40 (5). Available from: http://www.factiva.com. [cited 9 December 2007].
Grove, A. 1996. Paradigms of paranoia every company will be confronted by external crises that revolutionise the rules of its business. How can CEOs identify these exigencies before it is too late? Business Today. [online]. [Published 22 November 1996]. Available from: http://www.factiva.com. [cited 9 December 2007].
O’Shaughnessy, N. (1996) Michael Porter’s revisited, Management Decision, Vol. 34 Issue 6, pp.12-20.
Porter, M. (1979) How competitive forces shape strategy, Harvard Business Review, Vol. 57 Issue 2, pp.5-8.
Scott-Morton, M. (Ed.) (1991) The Corporation of the Nineties, Oxford: OUP.
Wolpert, J. (2002) Breaking out of the innovation box, Harvard Business Review, pp.77-83.
http://www.mindtools.com/pages/Newsletters/20Jan05.htm
http://www.themanager.org/Strategy/BeyondPorter.htm
Copyright 2002-2009 Papers4You.Com All Rights Reserved
Analysing external relationships
The following information is used for educational purposes only.
Analysing external relationships
Here the focus is on the near environment, which needs to be understood for the strategy to be deliverable. Kotler (1980) found four environments of importance: task (e.g. suppliers), competitive, public (e.g. institutions) and macro (e.g. social forces) enviromnents.
The far environment can be judged by the STEP (also known as PEST and some might know STEEP which adds Ecological) factors but it needs to be understood that these factors all interact. The factors are also context specifica and Fahey and Narayanan (1986) argued that the driving forces behind them need to be understood.
The near environment is filled with parties of frequent interaction. Here, each organisation will have its own set of interactions, especially if looking beyond the direct rivals into the broader picture. Companies should in the near-term focus on similar companies while companies with different capabilities provide the biggest threat in the long run.
Industry Structure
To develop a competitive strategy, we need to understand both our customers and competitors, hence the market we are competing in. Analysis of this is based on different methods which are explained in the Set Book from page 64 to 102. A major part of this is Porter's five forces model, which helps to find things like critical success factors, as well as to understand the industry one is competing in.
Porter's model gives you inforamtion on the attractiveness of the industry you are targetting, meaning potential profitability for you (see book 2)
Looking at all 5 forces, and changes between them, gives us a way of finding potential added value. As industry structures are changing, the models only work for a limited time. Porter's model describes not predicts. Changes in the industry, changes its boundaries and structure which likely leads to the need for new strategies.
(Next comes the Electrolux case, which will be referred to at several places within the book. )
Industry structure is only a starting point though, especially as all these models only provide a view, not the view of an industry. Rumelt (1991) found that most variation in organisational performance comes from differences between businesses rather than general industry attractiveness. Of course there are industries where the effect is bigger, but they are rare.
Strategic Groups
(Started with a Mini-Case of the European Food-Processing industry)
These are clusters of firms within an industry following the same or similar strategy (McGee, 1985).
Members of strategic groups are not equally capable though. The grouping comes mostly from a special configuration of resources common to the group. These create so called mobility barriers. They also offer protection of imitation from outside the group. McGee (1985) called them costs of imitation.
Strategic space and industry dynamics
Industry dynamics involve the decaying of mobility barriers due to changes in the significance of different resources (see food-market case).
To build a strategic group map, you need to choose two different important factors for a chart (e.g. geographic coverage and marketing costs) and place the different strategic groups of one to n companies within that chart.
Strategic space was introduced by McGee and Segal-Horn (1990, 1992). They take the strategic groups concept but do not place companies in the chart. They rather create a system of areas of opportunity within that chart for any given industry. These might not be available yet but could be in the future (e.g. non-branch banks). A strategist has to find a space and decide if it presents a viable strategy now or perhaps in the future.
Industry participants
To understand participants strategies, we need to look at their intentions, decisions and capabilities.
1. Intentions
Information can be gained from published remarks, annual reports and official statements of philosophy.
Kuhn (1962) suggested looking at how companies habitually act. This can be seen in:
- flexibility and responsiveness to customers
- aggressive or trustworthy or co-operative in competitive environment
- notice of strategic threats and speed of reacting to challenges
2. Decisions
Decisions are made against the background set by industry structure. If we understand the freedom of choices and look at their choices, then we can possibly deduct their future competitive behaviour.
If your product or service is not cheaper than anyone else's, or better than anyone else's or you don't serve me better or more conveniently than anyone else, why on earth should I prefer you to your competitors? - Porter 1994
How can this be achieved?
a. Deciding to specialise (e.g. strong branding, specialised sales force, dominating niche markt, ...): Customers need to have distinct needs and be willing to pay a premium.
b. Deciding to seek lowest-cost production: Deliver those value-added elements below a competitors price. This could be quality too. Economies of scale, accumulation of experience, superior operational logistics and a cost cutting culture can be important here.
c. Deciding to focus: There is high knowledge about what the customers wants needed here.
d. Decisions and industry structure: There is an interplay between the sources of advantage available and the decisions made.
3. Capabilities
Strategies that the participants are capable of carrying out. This needs concetration of resources and capabilities. You need to:
a. Understand the competitor's market segment as the capabilities need to fit.
b. Understand teh differences between value generating processes
c. Look for patterns of competitive behaviour. It is important to also look at competitors with a different approach to value generation.
Applying competitor-analysis techniques
Here the example of Electrolux is taken, which I will leave out here, as with all case studies.
Interaction in the industry
One form of interaction is competition and this is very dependent on the individual scenario but some generic strategies are:
- surprise (for short-term advantage)
- timing
- maximum use of resources
- vigour and skill
The other form is co-operation, a form that Hamel and Prahalad (1994) argued will be more important in many future opportunities.
© Copyright for this article belongs to Oliver Thylmann
Source of the article: http://owt.typepad.com/oubs/2003/06/book_3_analysin.html
This article comes from UK Student Portal
http://www.uk-student.net
Analysing external relationships
Here the focus is on the near environment, which needs to be understood for the strategy to be deliverable. Kotler (1980) found four environments of importance: task (e.g. suppliers), competitive, public (e.g. institutions) and macro (e.g. social forces) enviromnents.
The far environment can be judged by the STEP (also known as PEST and some might know STEEP which adds Ecological) factors but it needs to be understood that these factors all interact. The factors are also context specifica and Fahey and Narayanan (1986) argued that the driving forces behind them need to be understood.
The near environment is filled with parties of frequent interaction. Here, each organisation will have its own set of interactions, especially if looking beyond the direct rivals into the broader picture. Companies should in the near-term focus on similar companies while companies with different capabilities provide the biggest threat in the long run.
Industry Structure
To develop a competitive strategy, we need to understand both our customers and competitors, hence the market we are competing in. Analysis of this is based on different methods which are explained in the Set Book from page 64 to 102. A major part of this is Porter's five forces model, which helps to find things like critical success factors, as well as to understand the industry one is competing in.
Porter's model gives you inforamtion on the attractiveness of the industry you are targetting, meaning potential profitability for you (see book 2)
Looking at all 5 forces, and changes between them, gives us a way of finding potential added value. As industry structures are changing, the models only work for a limited time. Porter's model describes not predicts. Changes in the industry, changes its boundaries and structure which likely leads to the need for new strategies.
(Next comes the Electrolux case, which will be referred to at several places within the book. )
Industry structure is only a starting point though, especially as all these models only provide a view, not the view of an industry. Rumelt (1991) found that most variation in organisational performance comes from differences between businesses rather than general industry attractiveness. Of course there are industries where the effect is bigger, but they are rare.
Strategic Groups
(Started with a Mini-Case of the European Food-Processing industry)
These are clusters of firms within an industry following the same or similar strategy (McGee, 1985).
Members of strategic groups are not equally capable though. The grouping comes mostly from a special configuration of resources common to the group. These create so called mobility barriers. They also offer protection of imitation from outside the group. McGee (1985) called them costs of imitation.
Strategic space and industry dynamics
Industry dynamics involve the decaying of mobility barriers due to changes in the significance of different resources (see food-market case).
To build a strategic group map, you need to choose two different important factors for a chart (e.g. geographic coverage and marketing costs) and place the different strategic groups of one to n companies within that chart.
Strategic space was introduced by McGee and Segal-Horn (1990, 1992). They take the strategic groups concept but do not place companies in the chart. They rather create a system of areas of opportunity within that chart for any given industry. These might not be available yet but could be in the future (e.g. non-branch banks). A strategist has to find a space and decide if it presents a viable strategy now or perhaps in the future.
Industry participants
To understand participants strategies, we need to look at their intentions, decisions and capabilities.
1. Intentions
Information can be gained from published remarks, annual reports and official statements of philosophy.
Kuhn (1962) suggested looking at how companies habitually act. This can be seen in:
- flexibility and responsiveness to customers
- aggressive or trustworthy or co-operative in competitive environment
- notice of strategic threats and speed of reacting to challenges
2. Decisions
Decisions are made against the background set by industry structure. If we understand the freedom of choices and look at their choices, then we can possibly deduct their future competitive behaviour.
If your product or service is not cheaper than anyone else's, or better than anyone else's or you don't serve me better or more conveniently than anyone else, why on earth should I prefer you to your competitors? - Porter 1994
How can this be achieved?
a. Deciding to specialise (e.g. strong branding, specialised sales force, dominating niche markt, ...): Customers need to have distinct needs and be willing to pay a premium.
b. Deciding to seek lowest-cost production: Deliver those value-added elements below a competitors price. This could be quality too. Economies of scale, accumulation of experience, superior operational logistics and a cost cutting culture can be important here.
c. Deciding to focus: There is high knowledge about what the customers wants needed here.
d. Decisions and industry structure: There is an interplay between the sources of advantage available and the decisions made.
3. Capabilities
Strategies that the participants are capable of carrying out. This needs concetration of resources and capabilities. You need to:
a. Understand the competitor's market segment as the capabilities need to fit.
b. Understand teh differences between value generating processes
c. Look for patterns of competitive behaviour. It is important to also look at competitors with a different approach to value generation.
Applying competitor-analysis techniques
Here the example of Electrolux is taken, which I will leave out here, as with all case studies.
Interaction in the industry
One form of interaction is competition and this is very dependent on the individual scenario but some generic strategies are:
- surprise (for short-term advantage)
- timing
- maximum use of resources
- vigour and skill
The other form is co-operation, a form that Hamel and Prahalad (1994) argued will be more important in many future opportunities.
© Copyright for this article belongs to Oliver Thylmann
Source of the article: http://owt.typepad.com/oubs/2003/06/book_3_analysin.html
This article comes from UK Student Portal
http://www.uk-student.net
What is Balanced Scorecard?
The following information is used for educational purposes only.
What is Balanced Scorecard? What are the main aspects of Balanced Scorecard? How to write Good Balanced Scorecard analysis of a company? Where to find information for Balanced Scorecard? BALANCED SCORECARD Examples; Reports on Different Companies
Introduction
This paper provides a detailed account of and guidance to building Balanced Scorecard. It is intended to serve as a one-stop guide that answers every question that you may have about this important Strategic Management approach. The paper starts with describing the method and discusses in detail its various components with the help of diagram. It then, provides a practical guide to build a balanced scorecard using a seven step model. Examples are used where necessary to help explain the method. Links to further material and sources of information on this topic are also provided to help you learn more about Balanced Scorecard. After reading this paper, you should be able to apply the concepts and use the balanced scorecard method to analyse any organisation.
Balanced Scorecard is a concept that measures a company's activities in terms of its vision and strategies, to give managers a comprehensive view of the performance of a business. This new approach to strategic management was developed in the early 1990s by Dr Robert Kaplan (Harvard Business School) and Dr David Norton. A Balanced Scorecard enables organisations to clarify their vision and strategy, and translate them into action (Cobbold and Lawrie, 2002).
All professionals have their own methods of communication. Accountants do this with financial statements, engineers with building drawings and architects using physical models. For a long time, however, the strategic planners faced the dilemma of a way to communicate and convey the finished product – "the strategic plan" – to the end users. The traditional ways of presenting strategic plans, despite their nice covers, bar charts, well-written reports and professional layouts, have not been able to impact the people responsible for their execution. This resulted in poor execution of the strategic plan throughout the entire organisation. This situation is further compounded by the fact that, in most organisations, the strategic plan is normally devised by the upper management while the execution takes place at the lower level and is steered by the executives at tactical level (Kurtzman, 1997).
According to the Balanced Scorecard Collaborative (BSC, 2007), there are four reasons (Kaplan and Norton, 1992) for the failure of the strategic plan:
Few executives understand the strategies of the organisation below upper level management.
The objectives of most people are not linked to the strategy of the organisation
The organisational resources (e.g. time, energy and money) are often not allocated to those things that are critical to the organisation. Budgets, for example, are not always linked to the strategy.
Little time is spent by the management on strategy and too much on the short-term tactical decision making.
According to the survey by the Balanced Scorecard Collaborative only 5% of the workforce understands their company strategy; the incentives of only 25% of managers are linked to the strategy; over 60% of organisations do not link budgets to strategy; and 86% of executives spend less than one hour per month discussing strategy (Kurtzman, 1997).
A new way of communicating strategy was therefore required and this is the background from where the Balanced Scorecard emerged. Using this technique, the strategy is expressed in terms of measurements and targets to which employees can relate. The strategy thus reaches everyone in a language that makes sense and thus leads to much better execution of strategy (Cobbold and Lawrie, 2002). Today the Balanced Scorecard method is widely used by the leading players of the industry including AT&T, Canon, BMW, Siemens, United States' Postal Service and Lloyds TSB. According to the CEO of BMW, John Christman:
"The Balanced Scorecard links our objectives, initiatives, and metrics to our strategy while communicating our priorities to every member of our company. Today our BSC programme includes linkages to our project approval process, budgeting methodology, compensation system, technology initiatives, training programmes, and even our community involvement and charitable contribution efforts. Our results have been excellent with an uninterrupted history of growth and a successful strategy implementation that continues today, consistent with the first plans established over six years ago. Profits are up, return on assets is up, and assets have grown each year." (BMW, 2007)
Main aspects of the Balanced Scorecard
There are four main components of a Balanced Scorecard (as shown in the figure).
These are discussed below:
Financial Perspective: The importance of financial considerations is paramount in most situations and in most organisations. For any strategic choice, therefore, the timely and accurately presented funding data is critical and the sources of funding and budgeting must be done. Another key consideration is the prospects of sustainability of funding for the initiative required to implement the strategy. This component of the Balanced Scorecard therefore looks at the projects from a financial perspective and discusses financial considerations (Kaplan and Norton, 1992).
Customer Perspective: This area focuses on what must be done and what's most important, from the customer's perspective, to achieve the mission. The importance of customer focus and customer satisfaction has gained considerable importance in recent management philosophy. The increased competition in the markets means that it is easier than ever for the dissatisfied customers to switch suppliers. The objectives, measures, targets and, eventually activities are therefore planned to implement strategy regarding the customer satisfaction (Olve et al., 1999).
Internal Process Perspective: This component focuses on what an organisation must be doing well to meet the customer needs defined in the Customer Perspective. It also lets managers know how well their business is running and how well the internal processes are designed to meet the objectives. These may be divided into: a) mission-oriented processes and b) support processes. Specific measures and benchmarks are then set to monitor their effectiveness (Kaplan and Norton, 1992).
Learning & Growth Perspective: This perspective focuses on how an organisation is improving its ability to innovate, improve and learn in order to support success with the critical operations and processes defined in the Internal Process Perspective. This may include employee training and corporate culture attitudes. In the modern management philosophy, it is increasingly becoming important for the organisations to develop a culture of learning where the employees constantly learn and share the knowledge to facilitate growth. The on-the-job training and mentoring is also an essential component of the perspective.
Each of these four perspectives (Kaplan and Norton, 1996), has a set of objectives, measures, targets and initiatives to achieve strategic goals defined. These are discussed as follows:
Objectives: Within each perspective, objectives identify what needs to be done in order to achieve the overall mission. They answer the questions:
What must we do (from each perspective) to achieve the overall mission?
What is most important (from each perspective) to achieving the overall mission?
Measures: Measures provide a way to determine how an organisation is doing in achieving the objectives within the perspectives, and in turn the overall mission (Hubbard, 2007). They are the most "actionable" component in the Scorecard. Measures help answer the question:
How do we know how well we're doing in achieving our objectives, and in turn our overall mission?
Targets: Targets are set for each measure to monitor and evaluate the progress towards the objective (Hubbard, 2007).
Initiatives: These are the set of activities that are planned within each perspective in order to achieve the targets set for each measure.
Together, these four perspectives and the four components of each perspective make a grid that forms the Balanced Scorecard. In the next section, a seven-step model to build a Balanced Scorecard is discussed (Kaplan and Norton, 1996).
Building a Balanced Scorecard
The process of building a Balanced Scorecard can be divided into seven steps (Niven, 2006) that can be categorised into three phases:
Phase 1: The Strategic Foundation
Step 1: The organisation must be aligned around a clear and concise strategy. The strategy is what feeds the Balanced Scorecard. Therefore a strategic plan needs to be constructed at this stage. This includes the identification of the specific objectives that tell people what to do and a set of targets to convey what is expected. For example, a strategic objective may be to decrease the delivery times by 15% over the next six months through more localised distribution centres. This step is at the heart of Balanced Scorecards as the whole organisation needs to be aligned and rallied around strategic objectives and targets set at this stage. A communication plan is also outlined to convey these to stakeholders. This may include the communication of the plan to shareholders through a press conference, administrative staff through meetings and distributors through personal contact etc. (Niven, 2006).
Step 2: The major strategic areas on which the organisation must focus are then determined. It is important to restrict the organisation to select areas of key importance for strategic success otherwise it can find itself doing too many things. Most organisations' strategic focus is on the stakeholder groups such as customers, shareholders, and employees. Most public limited companies, for example will have "shareholder value" as a major strategic area. The strategic areas should be linked to the strategic goals defined in step 1. For example the strategic goal of having the most innovative product line of hand-held computers by the year 2008 means that the strategic area for the organisation to focus upon is "product innovation" (Olve et al., 1999).
Step 3: A strategic grid is built for each major strategic area of the business. Having devised the strategy in step 1 and identified the strategic areas in step 2, these are now translated into a set of grids. As described earlier, Balanced Scorecards are structured over four perspectives: Financial, Customer, Internal Processes, and Learning and Growth. Strategic grids include these four layers. Within each layer, the strategic objectives are placed, making sure everything links back. Trying to develop strategic objectives and placing them into the correct layers for all strategic grids is probably the most difficult step in building the Balanced Scorecard (Kaplan and Norton, 1996).
Phase 2: Three Critical Components
Step 4: Measurements are established for each strategic objective in the areas identified (Hubbard, 2007). The measurement criteria provide the targets which can then be used to measure the level of success in achieving them. For each strategic objective on the strategic grid, at least one measurement is required. If there are several measurements for a strategic objective, then chances are that there is more than one strategic objective. Is it possible to have an objective without a measurement? Yes, it is possible, but not having a measurement makes it difficult to manage the objective. It's best to revisit this objective and ask the question: Why is this an objective? Measurement makes it easy to quantify the strategic objectives, asking the question: How well are we doing? (Niven, 2006).
Step 5: Targets are set for each measurement. Measurement alone is not good enough. We must drive behavioural changes within the organisation if we expect to execute strategy. This requires establishing a target for each measurement within the Balanced Scorecard. Targets are designed to stretch and push the organisation in meeting its strategic objectives. For example, suppose the strategic objective is to improve customer satisfaction and the measurement is based on the number of customer complaints. The average number of monthly complaints is 45 for the last 12 months. A target of no more than 40 complaints could be established. Targets need to be realistic so that people feel comfortable about trying to execute on the target. Therefore, targets should be mutually agreed upon between management and the person held responsible for hitting the target. One good place to start in setting a target is to look at past performance. Past trends can be extended for modest improvement. The strategic goals can also provide clues as to what the targets should be (Hubbard, 2007).
Step 6: At this step, formal programmes, activities, initiatives or projects are designed and launched to achieve the targets set for each area. The final design step is to close the loop and put specific programmes in place to make everything happen. This is perhaps the trickiest part in the entire process. How does the organisation actually hit these targets and meet its strategic objectives? What major initiatives must the organisation undertake to make all of this happen? Programmes are the major projects that facilitate execution of everything downstream within the Scorecard. Some typical examples of programmes include quality improvement programmes, marketing initiatives, enterprise resource planning, customer relations management and supply chain management. These programmes usually have certain characteristics such as:
Sponsorship by upper level management.
Utilisation of designated leaders and cross-functional teams
Presence of deliverables, milestones and a timeline
Requiring resources (people, facilities, allocated budget, etc.) (Niven, 2006).
Phase 3: Development
Step 7: The entire process of building a Balanced Scorecard is repeated in other parts of the organisation to construct a single coherent management system. This integrates all parts of the organisation and allows successful execution of the strategy (ibid.).
Further Information
The books and the journal articles of Robert Kaplan and David Norton (1992 – 1996) must be the starting point to learning and understanding the Balanced Scorecard. These can be easily accessed via Athens login facility and using library. Many other authors such as Kurtzman (1997), Cobbold and Lawire (2002), Niven (2006) and Hubbard (2007) have also extensively worked on Balanced Scorecards. The Balanced Scorecard Institute, represented in 16 countries, also provides training and consultancy in using this method and holds extensive knowledge and expertise in this regard. Many key text books used in the universities, especially in management science courses, also explain and provide guidelines for building Balanced Scorecards.
If you found this article useful please have a look at the other articles we have written: Ansoff analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, Pest Analysis, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework and Product Life Cycle.
References
BMW (2007) 'Strategic Management', BMW (www.bmw.com)
BSC (2007) 'Balanced Scorecard Reports', Balanced Scorecard Collaborative (www.bscol.com/education/bsr/reprints)
Cobbold, I and Lawrie, G. (2002) 'The Development of the Balanced Scorecard as a Strategic Management Tool', Performance Management Association.
Hubbard, D. (2007) 'How to Measure Anything: Finding the Value of Intangibles in Business', John Wily & Sons.
Kaplan, R. and Norton, D. (1992) 'The Balanced Scorecard: Measures that drive performance', Harvard Business Review, pp77–80.
Kaplan, R. and Norton, D. (1996) 'Balanced Scorecard: Translating Strategy into Action', Harvard School Press.
Kurtzman, J. (1997) 'Is Your Company off course? Now you can find out why', Fortune (Feb), pp128–130.
Niven, P. (2006) 'Balanced Scorecard Step-by-Step: Maximising Performance and Maintaining Results', John Wiley & Sons.
Olve, N., Roy, J. and Wetter, M. (1999) 'Performance Drivers: A Practical Guide to Using the Balanced Scorecard’, John Wiley & Sons.
Copyright 2002-2009 Papers4You.Com All Rights Reserved
What is Balanced Scorecard? What are the main aspects of Balanced Scorecard? How to write Good Balanced Scorecard analysis of a company? Where to find information for Balanced Scorecard? BALANCED SCORECARD Examples; Reports on Different Companies
Introduction
This paper provides a detailed account of and guidance to building Balanced Scorecard. It is intended to serve as a one-stop guide that answers every question that you may have about this important Strategic Management approach. The paper starts with describing the method and discusses in detail its various components with the help of diagram. It then, provides a practical guide to build a balanced scorecard using a seven step model. Examples are used where necessary to help explain the method. Links to further material and sources of information on this topic are also provided to help you learn more about Balanced Scorecard. After reading this paper, you should be able to apply the concepts and use the balanced scorecard method to analyse any organisation.
Balanced Scorecard is a concept that measures a company's activities in terms of its vision and strategies, to give managers a comprehensive view of the performance of a business. This new approach to strategic management was developed in the early 1990s by Dr Robert Kaplan (Harvard Business School) and Dr David Norton. A Balanced Scorecard enables organisations to clarify their vision and strategy, and translate them into action (Cobbold and Lawrie, 2002).
All professionals have their own methods of communication. Accountants do this with financial statements, engineers with building drawings and architects using physical models. For a long time, however, the strategic planners faced the dilemma of a way to communicate and convey the finished product – "the strategic plan" – to the end users. The traditional ways of presenting strategic plans, despite their nice covers, bar charts, well-written reports and professional layouts, have not been able to impact the people responsible for their execution. This resulted in poor execution of the strategic plan throughout the entire organisation. This situation is further compounded by the fact that, in most organisations, the strategic plan is normally devised by the upper management while the execution takes place at the lower level and is steered by the executives at tactical level (Kurtzman, 1997).
According to the Balanced Scorecard Collaborative (BSC, 2007), there are four reasons (Kaplan and Norton, 1992) for the failure of the strategic plan:
Few executives understand the strategies of the organisation below upper level management.
The objectives of most people are not linked to the strategy of the organisation
The organisational resources (e.g. time, energy and money) are often not allocated to those things that are critical to the organisation. Budgets, for example, are not always linked to the strategy.
Little time is spent by the management on strategy and too much on the short-term tactical decision making.
According to the survey by the Balanced Scorecard Collaborative only 5% of the workforce understands their company strategy; the incentives of only 25% of managers are linked to the strategy; over 60% of organisations do not link budgets to strategy; and 86% of executives spend less than one hour per month discussing strategy (Kurtzman, 1997).
A new way of communicating strategy was therefore required and this is the background from where the Balanced Scorecard emerged. Using this technique, the strategy is expressed in terms of measurements and targets to which employees can relate. The strategy thus reaches everyone in a language that makes sense and thus leads to much better execution of strategy (Cobbold and Lawrie, 2002). Today the Balanced Scorecard method is widely used by the leading players of the industry including AT&T, Canon, BMW, Siemens, United States' Postal Service and Lloyds TSB. According to the CEO of BMW, John Christman:
"The Balanced Scorecard links our objectives, initiatives, and metrics to our strategy while communicating our priorities to every member of our company. Today our BSC programme includes linkages to our project approval process, budgeting methodology, compensation system, technology initiatives, training programmes, and even our community involvement and charitable contribution efforts. Our results have been excellent with an uninterrupted history of growth and a successful strategy implementation that continues today, consistent with the first plans established over six years ago. Profits are up, return on assets is up, and assets have grown each year." (BMW, 2007)
Main aspects of the Balanced Scorecard
There are four main components of a Balanced Scorecard (as shown in the figure).
These are discussed below:
Financial Perspective: The importance of financial considerations is paramount in most situations and in most organisations. For any strategic choice, therefore, the timely and accurately presented funding data is critical and the sources of funding and budgeting must be done. Another key consideration is the prospects of sustainability of funding for the initiative required to implement the strategy. This component of the Balanced Scorecard therefore looks at the projects from a financial perspective and discusses financial considerations (Kaplan and Norton, 1992).
Customer Perspective: This area focuses on what must be done and what's most important, from the customer's perspective, to achieve the mission. The importance of customer focus and customer satisfaction has gained considerable importance in recent management philosophy. The increased competition in the markets means that it is easier than ever for the dissatisfied customers to switch suppliers. The objectives, measures, targets and, eventually activities are therefore planned to implement strategy regarding the customer satisfaction (Olve et al., 1999).
Internal Process Perspective: This component focuses on what an organisation must be doing well to meet the customer needs defined in the Customer Perspective. It also lets managers know how well their business is running and how well the internal processes are designed to meet the objectives. These may be divided into: a) mission-oriented processes and b) support processes. Specific measures and benchmarks are then set to monitor their effectiveness (Kaplan and Norton, 1992).
Learning & Growth Perspective: This perspective focuses on how an organisation is improving its ability to innovate, improve and learn in order to support success with the critical operations and processes defined in the Internal Process Perspective. This may include employee training and corporate culture attitudes. In the modern management philosophy, it is increasingly becoming important for the organisations to develop a culture of learning where the employees constantly learn and share the knowledge to facilitate growth. The on-the-job training and mentoring is also an essential component of the perspective.
Each of these four perspectives (Kaplan and Norton, 1996), has a set of objectives, measures, targets and initiatives to achieve strategic goals defined. These are discussed as follows:
Objectives: Within each perspective, objectives identify what needs to be done in order to achieve the overall mission. They answer the questions:
What must we do (from each perspective) to achieve the overall mission?
What is most important (from each perspective) to achieving the overall mission?
Measures: Measures provide a way to determine how an organisation is doing in achieving the objectives within the perspectives, and in turn the overall mission (Hubbard, 2007). They are the most "actionable" component in the Scorecard. Measures help answer the question:
How do we know how well we're doing in achieving our objectives, and in turn our overall mission?
Targets: Targets are set for each measure to monitor and evaluate the progress towards the objective (Hubbard, 2007).
Initiatives: These are the set of activities that are planned within each perspective in order to achieve the targets set for each measure.
Together, these four perspectives and the four components of each perspective make a grid that forms the Balanced Scorecard. In the next section, a seven-step model to build a Balanced Scorecard is discussed (Kaplan and Norton, 1996).
Building a Balanced Scorecard
The process of building a Balanced Scorecard can be divided into seven steps (Niven, 2006) that can be categorised into three phases:
Phase 1: The Strategic Foundation
Step 1: The organisation must be aligned around a clear and concise strategy. The strategy is what feeds the Balanced Scorecard. Therefore a strategic plan needs to be constructed at this stage. This includes the identification of the specific objectives that tell people what to do and a set of targets to convey what is expected. For example, a strategic objective may be to decrease the delivery times by 15% over the next six months through more localised distribution centres. This step is at the heart of Balanced Scorecards as the whole organisation needs to be aligned and rallied around strategic objectives and targets set at this stage. A communication plan is also outlined to convey these to stakeholders. This may include the communication of the plan to shareholders through a press conference, administrative staff through meetings and distributors through personal contact etc. (Niven, 2006).
Step 2: The major strategic areas on which the organisation must focus are then determined. It is important to restrict the organisation to select areas of key importance for strategic success otherwise it can find itself doing too many things. Most organisations' strategic focus is on the stakeholder groups such as customers, shareholders, and employees. Most public limited companies, for example will have "shareholder value" as a major strategic area. The strategic areas should be linked to the strategic goals defined in step 1. For example the strategic goal of having the most innovative product line of hand-held computers by the year 2008 means that the strategic area for the organisation to focus upon is "product innovation" (Olve et al., 1999).
Step 3: A strategic grid is built for each major strategic area of the business. Having devised the strategy in step 1 and identified the strategic areas in step 2, these are now translated into a set of grids. As described earlier, Balanced Scorecards are structured over four perspectives: Financial, Customer, Internal Processes, and Learning and Growth. Strategic grids include these four layers. Within each layer, the strategic objectives are placed, making sure everything links back. Trying to develop strategic objectives and placing them into the correct layers for all strategic grids is probably the most difficult step in building the Balanced Scorecard (Kaplan and Norton, 1996).
Phase 2: Three Critical Components
Step 4: Measurements are established for each strategic objective in the areas identified (Hubbard, 2007). The measurement criteria provide the targets which can then be used to measure the level of success in achieving them. For each strategic objective on the strategic grid, at least one measurement is required. If there are several measurements for a strategic objective, then chances are that there is more than one strategic objective. Is it possible to have an objective without a measurement? Yes, it is possible, but not having a measurement makes it difficult to manage the objective. It's best to revisit this objective and ask the question: Why is this an objective? Measurement makes it easy to quantify the strategic objectives, asking the question: How well are we doing? (Niven, 2006).
Step 5: Targets are set for each measurement. Measurement alone is not good enough. We must drive behavioural changes within the organisation if we expect to execute strategy. This requires establishing a target for each measurement within the Balanced Scorecard. Targets are designed to stretch and push the organisation in meeting its strategic objectives. For example, suppose the strategic objective is to improve customer satisfaction and the measurement is based on the number of customer complaints. The average number of monthly complaints is 45 for the last 12 months. A target of no more than 40 complaints could be established. Targets need to be realistic so that people feel comfortable about trying to execute on the target. Therefore, targets should be mutually agreed upon between management and the person held responsible for hitting the target. One good place to start in setting a target is to look at past performance. Past trends can be extended for modest improvement. The strategic goals can also provide clues as to what the targets should be (Hubbard, 2007).
Step 6: At this step, formal programmes, activities, initiatives or projects are designed and launched to achieve the targets set for each area. The final design step is to close the loop and put specific programmes in place to make everything happen. This is perhaps the trickiest part in the entire process. How does the organisation actually hit these targets and meet its strategic objectives? What major initiatives must the organisation undertake to make all of this happen? Programmes are the major projects that facilitate execution of everything downstream within the Scorecard. Some typical examples of programmes include quality improvement programmes, marketing initiatives, enterprise resource planning, customer relations management and supply chain management. These programmes usually have certain characteristics such as:
Sponsorship by upper level management.
Utilisation of designated leaders and cross-functional teams
Presence of deliverables, milestones and a timeline
Requiring resources (people, facilities, allocated budget, etc.) (Niven, 2006).
Phase 3: Development
Step 7: The entire process of building a Balanced Scorecard is repeated in other parts of the organisation to construct a single coherent management system. This integrates all parts of the organisation and allows successful execution of the strategy (ibid.).
Further Information
The books and the journal articles of Robert Kaplan and David Norton (1992 – 1996) must be the starting point to learning and understanding the Balanced Scorecard. These can be easily accessed via Athens login facility and using library. Many other authors such as Kurtzman (1997), Cobbold and Lawire (2002), Niven (2006) and Hubbard (2007) have also extensively worked on Balanced Scorecards. The Balanced Scorecard Institute, represented in 16 countries, also provides training and consultancy in using this method and holds extensive knowledge and expertise in this regard. Many key text books used in the universities, especially in management science courses, also explain and provide guidelines for building Balanced Scorecards.
If you found this article useful please have a look at the other articles we have written: Ansoff analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, Pest Analysis, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework and Product Life Cycle.
References
BMW (2007) 'Strategic Management', BMW (www.bmw.com)
BSC (2007) 'Balanced Scorecard Reports', Balanced Scorecard Collaborative (www.bscol.com/education/bsr/reprints)
Cobbold, I and Lawrie, G. (2002) 'The Development of the Balanced Scorecard as a Strategic Management Tool', Performance Management Association.
Hubbard, D. (2007) 'How to Measure Anything: Finding the Value of Intangibles in Business', John Wily & Sons.
Kaplan, R. and Norton, D. (1992) 'The Balanced Scorecard: Measures that drive performance', Harvard Business Review, pp77–80.
Kaplan, R. and Norton, D. (1996) 'Balanced Scorecard: Translating Strategy into Action', Harvard School Press.
Kurtzman, J. (1997) 'Is Your Company off course? Now you can find out why', Fortune (Feb), pp128–130.
Niven, P. (2006) 'Balanced Scorecard Step-by-Step: Maximising Performance and Maintaining Results', John Wiley & Sons.
Olve, N., Roy, J. and Wetter, M. (1999) 'Performance Drivers: A Practical Guide to Using the Balanced Scorecard’, John Wiley & Sons.
Copyright 2002-2009 Papers4You.Com All Rights Reserved
Report Writing for Business Studies
The following information is used for educational purposes only.
Report Writing for Business Studies
Reports are a standard management communication tool, without which it would be impossible for an organisation to function effectively. Reports are also often required as course work in undergraduate papers, particularly in business. The following steps outline the process of business report writing and offer some useful tips along the way.
Setting the objective
A few minutes of sound structured thinking can save you hours of unproductive work. A clear objective in the form of a single sentence, which expresses exactly what you intend the report to achieve, will keep your mind focused and a touchstone against which you can measure your research. Think of your intended recipients when setting the objective; a report on the launch of a new product written for the Marketing Director would have a very different focus from that written for the Financial Controller. Ask yourself why the report is required, and what the recipients need to know about the proposal. Your objective should be specific and utterly clear in its emphasis. And having written your objective, you can then check with the person who requested the report that you have indeed outlined the requested information. Failure to achieve an objective can be the direct result of an unsatisfactory report in terms of structure, presentation and language.
Types of reports
There are basically two types of report, each requiring a different structure: Research reports and Information-Only reports.
A research report investigates a subject and reports on the findings. This might research a competitor's activities, consider options for a new computer system, or report on product development. The structure of a research report is the same as the structure used to write up scientific experiments.
The aim is the objective, and is expressed in a single sentence at the beginning.
The method explains how you researched your subject and the sources used.
The results present your findings in an objective and neutral fashion. Any unnecessary constructive detail should be included in an appendix.
The conclusion is where you express a subjective view drawn from the results of your research.
An information-only report is just that, it simply passes on information. It might be a memo, or the monthly budgets or management reports and updates. The structure of an information only report groups your organised information into a logical and clear sequence. This may be by date, turnover, location or order of importance. Occasionally there may no obvious sequence; you can't create logic where it simply doesn't exist!
Format and form
• A report should include some or all of the following:
• covering letter or memo
• title page
• executive summary
• table of contents
• introduction, method, discussion, conclusion, and/or recommendations
• bibliography/references
• appendices
• glossary
• index
For more detail regarding these, see 'Common Elements of a Report'. Please note that in some situations the method, results and discussion sections of a report may be replaced with alternative appropriately named sections according to the type of report that you are required to write, particularly if you are writing an information-only type report. Remember to consult your course book or assignment guidelines for more information regarding the specific report writing format that is required.
Writing style
• Write for the reader not for yourself. A report may need to be particularly formal, or very informal according to the circumstances.
• Keep your language simple, but avoid slang, jargon and clichйs.
• Use gender-neutral language.
• Use examples and analogies. Your reader can't interrupt or ask you to explain a point.
• Use short sentences and paragraphs rather than long-winded constructions.
• Choose your words with care. A misused word can cast doubt on your credibility.
Layout
• Use plenty of headings and subheadings as signposts for your reader.
• Use bullet points or numbers where possible, rather than continuous text.
• Use relevant tables, figures and appendices to support your text, but remember to adequately refer to these in your text.
Useful references
Emerson, L.. (Ed.). (1995). Writing guidelines for business students. Palmerston North: Dunmore Press.
Manalo, E., Wong-Toi, G., & Trafford, J. (2002). The business of writing: Written communication skills for business students (2nd ed.). Auckland: Pearson Education.
© Copyright for this article belongs to The University of Auckland
Student Learning Centre
This article comes from UK Student Portal
http://www.uk-student.net
Report Writing for Business Studies
Reports are a standard management communication tool, without which it would be impossible for an organisation to function effectively. Reports are also often required as course work in undergraduate papers, particularly in business. The following steps outline the process of business report writing and offer some useful tips along the way.
Setting the objective
A few minutes of sound structured thinking can save you hours of unproductive work. A clear objective in the form of a single sentence, which expresses exactly what you intend the report to achieve, will keep your mind focused and a touchstone against which you can measure your research. Think of your intended recipients when setting the objective; a report on the launch of a new product written for the Marketing Director would have a very different focus from that written for the Financial Controller. Ask yourself why the report is required, and what the recipients need to know about the proposal. Your objective should be specific and utterly clear in its emphasis. And having written your objective, you can then check with the person who requested the report that you have indeed outlined the requested information. Failure to achieve an objective can be the direct result of an unsatisfactory report in terms of structure, presentation and language.
Types of reports
There are basically two types of report, each requiring a different structure: Research reports and Information-Only reports.
A research report investigates a subject and reports on the findings. This might research a competitor's activities, consider options for a new computer system, or report on product development. The structure of a research report is the same as the structure used to write up scientific experiments.
The aim is the objective, and is expressed in a single sentence at the beginning.
The method explains how you researched your subject and the sources used.
The results present your findings in an objective and neutral fashion. Any unnecessary constructive detail should be included in an appendix.
The conclusion is where you express a subjective view drawn from the results of your research.
An information-only report is just that, it simply passes on information. It might be a memo, or the monthly budgets or management reports and updates. The structure of an information only report groups your organised information into a logical and clear sequence. This may be by date, turnover, location or order of importance. Occasionally there may no obvious sequence; you can't create logic where it simply doesn't exist!
Format and form
• A report should include some or all of the following:
• covering letter or memo
• title page
• executive summary
• table of contents
• introduction, method, discussion, conclusion, and/or recommendations
• bibliography/references
• appendices
• glossary
• index
For more detail regarding these, see 'Common Elements of a Report'. Please note that in some situations the method, results and discussion sections of a report may be replaced with alternative appropriately named sections according to the type of report that you are required to write, particularly if you are writing an information-only type report. Remember to consult your course book or assignment guidelines for more information regarding the specific report writing format that is required.
Writing style
• Write for the reader not for yourself. A report may need to be particularly formal, or very informal according to the circumstances.
• Keep your language simple, but avoid slang, jargon and clichйs.
• Use gender-neutral language.
• Use examples and analogies. Your reader can't interrupt or ask you to explain a point.
• Use short sentences and paragraphs rather than long-winded constructions.
• Choose your words with care. A misused word can cast doubt on your credibility.
Layout
• Use plenty of headings and subheadings as signposts for your reader.
• Use bullet points or numbers where possible, rather than continuous text.
• Use relevant tables, figures and appendices to support your text, but remember to adequately refer to these in your text.
Useful references
Emerson, L.. (Ed.). (1995). Writing guidelines for business students. Palmerston North: Dunmore Press.
Manalo, E., Wong-Toi, G., & Trafford, J. (2002). The business of writing: Written communication skills for business students (2nd ed.). Auckland: Pearson Education.
© Copyright for this article belongs to The University of Auckland
Student Learning Centre
This article comes from UK Student Portal
http://www.uk-student.net
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The following information is used for educational purposes only. La vejez. Drama y tarea, pero también una oportunidad Los años permiten r...
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The following information is used for educational purposes only. Jill Shargaa: Please, please, people. Let's put the 'awe...
