Exam 10 October, questions and answers PDF

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Strategic Management Exam Questions Question -1What do we mean by the nature of environment and how can we improve our understanding of it? Answer: The formulation of strategy is concerned with matching the capabilities of the organization to its environment. But the word environment encapsulates different influences and it is difficult to understand its diversity. There are two responses which are dangerous in their limitations. The first is the balance sheet approach, which consists of listing all the conceivable environmental influences under what amount to plus and minus headings. So, this list may be very long for most organizations. However, if environmental analysis consists of this long list and nothing more, then the limitations are significant. The second piecemeal which means understand the environment from overall impact. In practice, managers cope with range of influences by evolving, overtime, accepted wisdom about their industry, its environment and what are sensible responses to different situations. No organization can exist without interact with the external environment, so external environment is very important. Managers have always to deal with change, but there are two ways in which environmental change is becoming more problematic: First: the speed and frequency of change is accelerating, and this raises two major problems, (1) the speed of change may be difficult to cope with and (2) environmental change is not always predicted by organization and when it occurs may induce paralysis which prevent managers coping with such change. Second: structure of many modern organizations, which may hinder strategic awareness of capability. So, perceived changes in environmental influences signal to the possible need for changes in strategy. Managers also have to cope with uncertainty, they have to reduce the uncertainty and to do this they have to ask how uncertain is the environment? What are the reasons for that uncertainty? And how should the uncertainty be dealt with? Environmental uncertainty increases the more conditions are dynamic or the more they are complex. The degree of dynamism is to do with frequency of change. Complexity may result in different ways. (a) May result from the sheer diversity of environmental influences faced by an organization. (b) May also arise because of the amount of knowledge required to handle environmental influences. (c) Complexity may increase if the different environmental influences are in themselves interconnected. The lowest the uncertainty exists where conditions are static and simple. Understating Simple/Static Conditions: In simple/static conditions an organization is faced with an environment which is not too difficult to understand and is not undergoing significant change. Such organizations can cope with understanding their environment by seeking for understanding of the environment on an historical basis. An historical pattern, once identified might well be expected to continue overtime, or at last be sensibly refined systematically. The aim is to understand such complexity as does exist. This can be done by concentrating on detailed analysis of the past to be used as a basis for forecasting the future. In static condition, whether they be simple or complex, environmental scanning is likely to be more continuous, systematic exercise than in dynamic situations. Since there is more likelihood of being able to use the past as a predictor of the future it is worth investing management time in systematic scanning.

Another sensible of dealing with situations of low complexity is to seek for some predictor of environmental change that might take place. Problems of historical approach, some of these predictors will create a problem if there are other influences also management become bound by their own recipe. Understanding Dynamic Conditions: In dynamic condition the environment is changing. Organizations faced by technological advances or sophistication of customers make difficult to the managers to predict from the past. We need to follow more future orientation approaches for dynamic conditions. To cope with uncertainty there are organizational responses and there are information gathering responses. Organizational responses involve ensuing that the structure of the organization is such that it can sense efficiently what is going on in the environment and be flexible enough to respond to such changes. As the dynamic conditions increase the interpretation of these conditions becomes more inspirational. Managers sensibly address themselves to considering the environment of the future, not just of the past. There are structured ways of trying to understand and deal with the future. Some forms of scenarios might be taken, this could involve identify possible major environmental future change by a methods such as Delphi Technique and based on these projections, building alternatives scenarios of the future. The aim would be to evolve different strategies for different possible futures. It would be then possible to monitor environmental change to see which of these scenarios is most appropriate. So, you need to keep your eyes in the future. There are dangers of course. Both a reliance on individuals’ sensitivity to trends and the more formal approach of scenario planning suffer from the risk of myopic perception and response. It is sometimes difficult to get managers to conceive of markedly different scenarios and responses than those already familiar to them – a problem of recipes again. Another danger is that possible scenarios cease to be thought of as possibilities and start to be thought of as real. Managers may build inflexible strategies and organizational structures around mere possibilities rather than creating the flexibility in strategy and structure that would allow speedy responses to environmental change as it actually occurs. Understanding Complex Conditions: Organizations in complex situations are faced with environmental influences difficult in themselves to comprehend organization facing complexity may also face dynamic conditions. How, then, do organizations facing complexity cope with their conditions? There are organizational and information processing approach the organizational approach the may involve ensuring that complexity as a result of a high knowledge requirement is handled by specialists. Complexity as a result of diversity might be dealt with by ensuring that different parts of the organization responsible for different aspects of diversity are separate and given the resources and authority to handle their own part of the environment (differentiation). As for information processing and analysis, the organization faces the problem of comprehension. It may have devolved responsibility to specialists or part of the organization, but how does it obtain information to make sensible strategic decision? Typically there may be two responses: First: the specialists become very powerful in that they relied upon not only to make operational decisions but are trusted to present information in such a way that a sensible strategic decisions can be made, or indeed they themselves become responsible for the strategic decisions. Second: some attempt is made to model the complexity. This may be done through a financial model. The danger in complex situations are directly linked to the problem of comprehension. Specialists themselves may not be able to understand the conditions they face, or more commonly, non-specialist, perhaps general managers, fail to create system which can cope with the complexity.

Question -2A- What are the main characteristics of strategic decisions? B- What measures can we use for assessing resource utilization? (how resources influence our strategy)

Answer to question (A) The characteristics usually associated with the word strategy and strategic decisions are: 1- The scope of organizations activities: does the organization concentrate on one area of activity, or does it have many. The issue of scope of activity is fundamental of strategic decision because it concern the way in which those responsible for managing the organization conceive its boundaries. It is to do with what they want the organization to be like and to be about. 2- The matching of the activities of an organization to the environment in which it operates, and since the environment is continually changing, strategic decisions usually involve change, often of a major kind. 3- The matching of the organization’s activity to its resource capability: strategy is not just about countering environmental threats and taking advantage of environmental opportunities. It is also about matching organizational resource to those threats and opportunities. 4- The allocation and reallocation of major resources in organization: this may be decisions to acquire whole new areas of resources, dispose of others or fundamental reallocate others. 5- The values, expectations, and goals of those influencing strategy: in some respect, strategy can be thought of as a reflection of the attitudes and beliefs of those who have most influence in the organization. 6- Strategic decisions may well affect the long term direction of an organization. They often have longer time horizons than day-to-day operating decisions. 7- Strategic decision are often complex in nature, involving many considerations from within and without the organization and being likely to have many ramifications.

Answer to question (B) To gain a better understanding of the way the resources have influenced company policy it is necessary to analyze the way that the company’s resources have been utilized. In other words, it is an assessment of how efficiently resources have been utilized. Care must be taken not to overlook the fact that poor utilization of resources may have occurred for other reasons; in particular, they may not have been used effectively. For clarity the distinction between these two measures of efficiency and effectiveness is summarized by: Efficiency is to do with how well resources have been utilized irrespective of the purpose for which they were deployed. Effectiveness is to do with whether the resources have been deployed in the best possible way. Assessing Efficiency: There are number of different measures of efficiency in resources analysis: 1- Profitability: is a broad measure of efficiency for commercial organizations, particularly, if its related to the amount of capital being used to run the business, and other financial measures. 2- Labor productivity: is a measure of how efficiently the human resources are being used. Productivity measurement may help managers to identify necessary changes in the way that resources are used.

3- Yield: usually used to reflect cost (price) of competitiveness between companies. Yield can be very important measure of efficiency in industries where raw materials or energy are major elements of cost. 4- Capacity fill: it would be viewed as a prime measure of efficiency for organizations whose major cost is overheads. This is particularly important in many service industries where there is often no extra cost attached to satisfying additional customers. 5- Working capital: working capital utilization can reveal much about the way in which the financial resources are used strategically. An assessment need to be made of how well the company has managed to achieve an appropriate balance between the risks it runs from operating at low levels of working capital and the efficiency of having too much working capital. 6- Production system: understanding the various aspects of a company’s production system such as job design, layout and materials flow are important when assessing a company’s efficiency in production terms. For example, that excessive cost have been incurred through unnecessary handling and transportation of materials during manufacture or that the company could take advantage of new operational methods. Assessing Effectiveness (ineffectiveness leads to inefficiency) A full understanding of company’s use of resources also requires an analysis of the effectiveness with which resources has been used. There are number a number of different measures of effectiveness: 1- Use of people: there are many situation where a workforce may be used ineffectively. The skilled man may be assigned to unskilled work; the division of work within a sales team may be such that the poorest salesman has been given the toughest area. So, the right person should in the right job. 2- Use of capital: an analysis of change in a company’s long-term funding (capital structure) may give useful insight, means long-term funding should not be used to finance short-term funding. 3- Organization structure: structure follows strategy. An inappropriate organization structure can cause ineffectiveness due to inability to respond to external stimuli (incentives), failure to coordinate activities or the handling of problems at inappropriate management levels. 4- Use of marketing and distribution resources: the effectiveness with which a Salesforce is being used can often be judged by assessing the volume of sales which each salesman produces. Advertising or distribution expenditure may be more difficult to assess. 5- Use of research knowledge: the assessment of how effectively research knowledge is used is equally problematic. Tangible measures are available such as the number of product and process changes developed internally. Or competitive advantage which has been gained from technical improvements resulting in better quality or lower cost. Companies are increasingly trying to cope with their worries about their underutilization of the R&D resource by providing better links with the commercial function and improving monitoring and control arrangements. However, because of the long period of time needed before the real impact of new product or process change can be properly assessed, this type of analysis tends to be very retrospective and not very helpful in understanding how well these R&D resources are being used today. 6- Use of production system: poor utilization of resources may result from the choice of an inappropriate system of production. For example, using technique which is not suitable for the weather. 7- Exploitation of intangible assets: such as image, brand names, or market information is another measure of effectiveness

Question -3Porter’s Model helps with the structural analysis of the environment. How does this model work?

Answer: Porter’s model is essentially a structural means of testing the competitive environment of an organization so as to provide a clear understanding of the forces at work. Porter argues that competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in particular industry. The task of the strategist is to determine which of these forces are of the greatest importance to the organization. There are four key forces to be considered:

Potenalentrants

Threatofentrants

Compeve Suppliers Bargaining power

Rivalry

Buyers Bargaining power

Threat of substitutes

Substitutes

1- The Threat of Entry: The threat of entry will depend in the extent to which there are barriers to entry (things stop the company to enter the market). Is it possible to the companies to enter particular market? From two prospects (1) you want to enter. (2) You are already in the market and trying to stop others to enter the market. These barriers are:

(a) Economies of scale: this require knowing the optimum scale of operation and also knowing how damage is going to be to operate below that level. It’s difficult to assess economies of scale but it depends for some extent on how large is the market and how many competitors are there. EOS are the cost advantages that a business obtains due to expansion. (b) The capital requirements of entry: how much capital you require? How you get particular resources to enter the area? It’s connected to economies of scale. It’s require involvement of the enormous capital expenditure to setup compete fully system. (c) Product differentiation: (the product which is unique in the market) this may be as a result of strong brand image, product or service quality, efficiency of distribution. Differentiation will vary by industry. (d) Access to distribution channels: production and distribution go together, if there is no channels of distribution so, you cannot enter the market. (e) Cost disadvantages independent of size: to large extent these are to do with early entries into markets and the experience so gained. This phenomenon is usually known as the experience curve. The experience curve indicates that as the number of year’s increase the cost of production will decrease. (f) Legislation or government action: the government may intervene to prevent a company acquiring another or a license issued by a government agency may be required to operate in certain industry.

2- The Bargaining Power of Buyers and Suppliers: Buyers and suppliers are influencing margins, the greater their power the more likely it is that margins will be low. (a) Suppliers power is likely to be high when: There is concentration of suppliers rather than fragmental sources of supply. Switching cost is high from supplier to another, because a manufacture process are dependent on the specialist product of supply.  There is possibility for the supplier to integrate forward.  The suppliers’ customers are of a little importance to the supplier, in which case the supplier is not likely to regard the long-term future of the customers as a particular importance. (b) Buyers power is likely to be high when:  There is concentration of buyers, if the volume purchases of buyers is high.  There are alternatives sources of supply.  

 If the components or material cost the buyer trying to purchase is high.  If buyer integrate backward. 3- The Threat of Substitutes: Substitution threat may take different forms; it might be from one product to another. Substitution may hold down or depress margins. It concerns with the danger that substitute may encroach upon an organization activities as well as steps can be taken to minimize the risk of such substitution, perhaps through differentiation or with low cost profiles. And, more positively, is there the possibility that one’s own products could find new markets as substitutes for some other product.

4- The Extent of Competitive Rivalry (The Rivalry Against Existing Competitors): Competitors concerned with the degree of rivalry between themselves in their own industry. The degree of rivalry or the factors affect the intensity of competing in the market are:

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The extent to which competitors in the industry are in balance. Whatever their number, where competitors are of roughly equal size there is the danger of intense competition as one competitor attempts to gain dominance over another. A market in slow growth: particularly one which is entering its maturity stage and competitors are keen to establish themselves as market leaders – is likely to be highly competitive. High fixed cost in an industry, perhaps through high capital intensity or high costs of storage, is likely to result in competitors cutting prices to obtain the turnover required (price wars and very low margin operation).

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Importance of product differentiation. If a product or service is not differentiated then there is little to stop customers switching between competitors.

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The condition or status of extra capacity. If the addition of extra capacity is in large increments then the competitors making such an addition is likely to create at least shortterm over capacity and increased competition.

The degree of the exit barriers to an industry. Exit barriers might be high for a variety of reasons; they may vary from a high investment in non-transferable fixed assets, to the reliance on one product to be credible within a market sector even if the product itself makes heavy losses. 5- The Significance of...