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CHAPTER 2
LITERATURE REVIEW
2.1 Definition of Management Management involves coordinating and overseeing the work activities of others so that their activities are completed efficiently and effectively, Efficiently is getting the most output from the least amount of inputs, efficiency often referred to as doing things right, effectively is doing those works that will help the organization reach its goals, this often referred to doing the right things (Robbins, 2012). According to Follett (1918), Management is the art of getting things done through people. Then according to Fayol (1909), to manage is to forecast and to plan, to organise, to command, to co-ordinate and to control. Based on Kosasih and Soewedo (2009:1), Management is directing and actuating a group of people and facilitate them in order to achieve a specific goal. After hearing some expert definition about Management, we can conclude that management is the process of planning, organizing, leading and controlling in order to achieve a specific goal and getting the jobs done through other people.
2.2 Strategy and Strategic management Strategy is a term that comes from the Greek strategia, meaning "generalship." In the military, strategy often refers to manuvering troops into position before the enemy is actually engaged. In this sense, strategy refers to the deployment of troops. Once the enemy has been engaged, attention shifts to tactics. Here, the employment of troops is central. Substitute "resources" for troops and the transfer of the concept to the business world begins to take form (Nickols, 2012).According to Kenneth Andrews (1987), Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities. Strategy fundamentally is about two things; the first one is where you want your business to go, second is how you will get there. It’s almost the same with planning a journey,
the strategic plan knows where you want to go, the place you’re starting, and how to travel based on the resource and time that we have (Whalley, 2010). Strategy is the plan for how the organization will do whatever it’s in business to do how it will compete successfully, and how will it attract and satisfy its customers in order to achieves its goal. Strategy in corporation can be formed as a business model. A strategy of a firm is generated by the strategic thinking of managers in that company. As strategists in the company managers has to know the strategic problem that happens in the company, and they need to engage in cognitive activities, these cognitive activities need to be structured into a strategic reasoning process. Strategic reasoning process has 4 elements which are: 1 identifying the problem, 2 Diagnosing the causes and nature of the problem, 3 Conceiving, formulating, and imagining the potential solution of the problem, 4 Realizing what actions should be taken and evaluate the result is it positive or negative (De Wit & Meyer, 2010). Strategy can be categorized to 3 main levels of corporate, business, and functional:
- Corporate Level Strategy: the highest level of strategy because it gives the long range guidance for the whole organization. Like what business the organization should be in.
- Business Level Strategy: in this level focusing on products and services that will be delivered to customers, the question here is how to compete in the market.
- Functional Level Strategy: this level is where the function of the business like marketing, sales, operation, finance make a long range plans that can support the competitive advantage of the company, the question here is how does the function contribute well to the business strategy (James, 2011). Strategic management is the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. Strategic management is a process through which organizations can recognize themselves and their surrounding environments and plan, implement and monitor their strategies (Hashemi, Mazdeh, Razeghi, & Rahimian, 2011). Strategic management is the thing that all managers do to create a strategy for the organization. Three reasons why every company has to implement strategic
stakeholder’s value and expectation and take into account the scope and boundaries of the organization(Adebisi & Oghojafor, 2011). A mission statement can be either long or short but it has to include the basic function or tasks of an organization and the targeted customers or clients that the organization seeks to satisfy(Ritson, 2013).
2 .3.2 Porter’s Five Forces Model
The Porter’s five forces model works by Identify key aspects or elements of each competitive force that impact the firm, Evaluate how strong and important each element is for the firm, Decide whether the collective strength of the elements is worth the firm entering or staying in the industry. Porter’s five forces model of competitive analysis is an illustration of how the five competitive forces can be used to explain low profitability and viable entries to an industry (Indiatsy, Mwangi, Mandere, Bichanga, & George, 2014). The five competitive forces of Porters define the rules of competition, and also determine the attractiveness and profitability of an industry (Robbins, 2012). The Figure 2.1 explains all the forces of Porter’s 5 forces model and the connection between all the forces.
Figure 1.1 Porter’s Five Forces Model Source: (David& David, 2015: 106) The Five Forces are:
- Rivalry among competing firms There are several factors that caused high rivalry among competing firms such as high number and size of competing firms especially if every competitors have similar capability and size, it will lead to more intense competition, when there is low product differentiation and low switching cost
(Cheng, 2013), when the exit barriers are high and expensive to exit the industry every competitors will do much effort to stay in the industry (Riley, 2012).
- Potential Entry of New Competitors Threats of new entrants can be explained as the possibility that the profit and market share of established company in an industry may be taken by a new player in the industry. The size of the threats depends on existing barriers to entry and the combined reaction among all existing players(Indiatsy, Mwangi, Mandere, Bichanga, & George, 2014). If entry barriers are high the new player must be aware of the sharp retaliation from the existing player and the threats of new entry becomes low(Porter, 1998).
- Potential development of substitute products The Question that should be asked in this force is how likely / easy is that other’s industries’ product can be a substitution for our industry’s product(Robbins, 2012)? To identify a substitute product for the industry’s product involves finding the product or service which can perform the same function as the industry’s product can do (Riley, 2012).
- Bargaining power of supplier The bargaining power of supplier will increase when there are only few numbers of suppliers, few substitutes product, the costs of switching raw material is high. Backward integration is gaining control or ownership of suppliers, by doing backward integration the company can reduce the bargaining power of supplier. Suppliers can pressurize an industry by through price increments or quality reduction of the purchased products. Powerful suppliers can reduce the profitability of industry so much until they can't recover the costs of raw material inputs(Indiatsy, Mwangi, Mandere, Bichanga, & George, 2014).
- Bargaining power of consumers The buyers from an industry can has a powerful bargaining power if they are more concentrated than the sellers in the industry, they are able to force down prices by purchase in large volumes, and they also able to reduce the industry margin by demand higher quality of product and services (Cheng, 2013).
known as PEST factor. PEST stands for Political, Economic, Social and Technological factors. The company must aware of their macro-environment for the actual and potential change in the PEST factors, then assess the importance of the change to the industry, analyze the relevancies and relationships between each changes, and assess the potential impact of those changes to the industry. Second the micro environment is more specific to analyze the competitive forces. In order to analyze the competitive forces use the porter’s five forces model as a tool (Ritson, 2013). The detail of Porter’s 5 forces model is already discussed above.
2.3.3.2 The Internal Assessment The Internal assessment is the process of analyzing the competences, core competences, and the resources in the company. Competences are collection of attributes that possessed by all company in industries to survive in the industry, competence can be developed from resources and potential to be developed as core competence. Core or distinctive competencies are a firm’s attribute or a set of attributes which enables an organization to produce above industry average performance(Ritson, 2013).The resources of an organization is their asset, it can be categorized as several categories such as financial resources, physical resources, human resources, and intangible resources(Robbins, 2012). Some companies might be used the resource based view (RBV) approach when they perform internal audit. Resource based view is efficiency-based explanation of company’s performance differentiation. Resource based view emphasizes the company’s resources as the fundamental source of competitive advantage and performance (Bridoux, 2004). The goal of recognizing the internal environment of the company is finally figure out the strengths and weaknesses of the company. There are some factors that should be considered when a company does the internal investment such as: 1. management and company structure, 2. Sales and marketing,
- Finance and accounting, 4. Research and development, 5. Competitive forces, and
- Manpower (Hashemi, Mazdeh, Razeghi, & Rahimian, 2011).
2.3.4 The Matching Stage The matching stage is the stage where the data that have been gathered is processed. This matching stage focuses on generating feasible alternative strategies by aligning the external opportunities and threats with the internal strength and
weaknesses. There are five techniques in this stage include the Strengths- Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix. In order to effectively generating feasible strategies the organization has to match the external and internal critical success factors (David & David, 2015: 205). The SPACE matrix shows two internal dimensions, being Financial Strength (FS) and Competitive Advantage (CA), against two external dimensions, being Environmental Stability (ES) and Industry Strength (IS). All four factors are the most important determinants of a company’s overall strategic position, and measured a six-point Likert scale to corresponding axes (Rumanti & Syauta, 2013). The Boston Consultancy Group (BCG) Matrix helps to evaluate the product portfolio of a company and categorized it into 4 categories which are: star, problem child, cash cow and dog. This matrix is used to determine each product’s relative market share compared to its market leader. For the problem child company the product is underperforming in a growing market it means the product needs to be fixed. A star is a product that performing well in high growth market, it also can be a leader in the market. The cash cow is a mature product in the mature market it’s less growing but generates high income. A dog is a product that shouldn’t be developed (Rowe, 2008). For the SWOT Matrix, Grand Strategy Matrix, and Internal-External (IE) Matrix will be discussed further in chapter three.
2.3.5 The Decision stage The Quantitative Strategic Planning Matrix (QSPM) is a very common methods and techniques in evaluation of strategic options and determination of relative attractiveness of several potential strategies, the attractiveness score of strategies will be used in the stage of decision making. The QSPM technique determines which of the potential strategies options is the most feasible with the company (Sohajei, Taheri, & Mighani, 2010). QSPM provides a transparent framework in the process of strategy prioritization (Hashemi, Mazdeh, Razeghi, & Rahimian, 2011). QSPM is a high level strategic management approach for evaluating and comparing possible strategies and alternative course of action. There are 6 basic components of QSPM: 1. Key factor statements, 2. Strategies to be evaluated, 3.
really expensive and unreliable, when the numbers of supplier is relatively small and the competitors is so many, when the stable price is really important for company’s advantage, when the resources must be acquire as soon as possible, when present supplies have high profit margin which suggests that the supplying business in this industry is quite promising and profitable, when the company has enough capital and human resources to build the new business of supplying their own materials.
- Horizontal integration: a strategy of seeking ownership of or increased control over a firm’s competitors. This strategy best suit when there is no government regulation that prohibit monopolistic characteristics in the area or region, when the company competes in growing industry, when increased economies of scale provide major competitive advantages, when competitors are faltering because the lack of management expertise(David & David, 2015:168-170). Intensive Strategies:
- Market penetration strategy: seeks to increase market share for present products or services in present markets through greater marketing efforts. However the decisions make in marketing are more complex than expected but with the right planning and decisions it can be an effective tool in driving the sales amount of the company (Dewhurst, 2014). This strategy best suit when current markets are not saturated with the particular products and services, when the usage rate of present of present customers can increased significantly, when the market shares of major competitors have been declining while total industry sales have been increasing, when the increased economic of scales become major competitive advantage.
- Market development: involves introducing present products or services into new geographic areas. This strategy best suit when new channels of distribution are available the channels must be reliable, inexpensive, and good quality; when an organization is performing really well in the industry; when new untapped and unsaturated markets found; when an organization as excess production capacity.
- Product development strategy: seeks increased sales by improving or modifying present products or services. This strategy best suit when the successful product of the company reach its maturity stage on the product life
cycle, when an organization competes in an industry that characterized by rapid technology development, when the company’s competitors offering the similar product but with better quality and comparable prices (David & David, 2015: 171-172). Diversification Strategies:
- Related diversification: value chains possess competitively valuable cross- business strategic fits. This strategy is about transferring competitively valuable expertise, technological know-how, or other capabilities from one business to another, combining the related activities of separate businesses into a single operation to achieve lower costs, exploiting common use of a well- known brand name. This strategy best suit when an organization competes in a no-growth or a slow-growth industry, when adding new, but related, products would significantly enhance the sales of current products, when new, but related, products could be offered at highly competitive prices, when an organization has a strong management team.
- Unrelated diversification: value chains are so dissimilar that no competitively valuable cross-business relationships exist. This strategy best suit when revenues derived from an organization’s current products would increase significantly by adding the new, unrelated products, when an organization’s present channels of distribution can be used to market the new products to current customers, when an organization’s basic industry is experiencing declining annual sales and profits, when an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity, when existing markets for an organization’s present products are saturated, when antitrust action could be charged against an organization that historically has concentrated on a single industry (David & David, 2015:173-175). Defensive Strategies
- Retrenchment: occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits, also called a turnaround or reorganizational strategy. This strategy designed to fortify an organization’s basic distinctive competence. Retrenchment strategy best suit when an organization is one of the weaker competitors in a given industry, when an organization is plagued by inefficiency, low profitability, and poor employee
Then, the existing status of each factor has been determined by a ranking from 1 to 4 (Mirzakhani, Parsaamal, & Golzar, 2014).
Figure 2.2 IFE Matrix Source: www. Mba-lectures.com
In the Figure 3.1 shows the example Internal Factor Evaluation (IFE) Matrix of Coca- Cola Company. There are several steps to construct IFE Matrix:
- List key internal factors as identified in the internal-audit process
- Assign a weight that ranges from 0.0 to 1.0 (most-important) to each factor
- Assign a 1-to-4 rating to each factor to indicate whether that factor represents a strength or weakness
- Multiply each factor’s weight by its rating to determine a weighted score for each variable
- Sum the weighted scores for each variable to determine the total weighted core for the organization (David & David, 2015:110-111).
2.4.2External Factor Evaluation (EFE) Matrix The External Factors Evaluation (EFE) matrix is a tool for analyzing the trend of accountability and the way that the organizational managers are able to realize and understood the opportunities and threats of an industry that happen outside the organization. The objective of analyzing industries and examining environmental factors is to exploit opportunities and avoid threats. The forces which should be considered in this regard include: 1- economic forces, 2- environmental, ecological, cultural and social forces, 3- legal, governmental and political forces, 4- technological forces, and 5- competitive forces (Hashemi, Mazdeh, Razeghi, & Rahimian, 2011).
Figure 2.3 EFE Matrix Source: www.mba-tutorials.com
In this Figure 3.2 shows the example of the External Factor Evaluation of Nextel Communication Company, based on the picture above the company responding quite well to environment for exploiting opportunities and overcome threats. There are several steps to construct External Factor Evaluation such as:
- Identify a list of KEY external factors (critical success factors).
- Assign a weight to each factor, ranging from 0 (not important) to 1.0 (very important).
2.4.4 Strengths-Weaknesses-Opportunities-Threats Matrix SWOT Analysis is one of the most useful tools and common for defining a company’s strategic action by analyzing company’s internal capabilities and external environment to figure out appropriate opportunities and threats (Sohel, Rahman, & Uddin, 2014). By analyzing with SWOT matrix the company will figure out several strategies that can be used to maximize the strengths, minimize weaknesses, grab the opportunities and eliminate the threats. SWOT is one of the most important tools in strategic management literature so that many researchers and strategists have focused on this matrix (Mirzakhani, Parsaamal, & Golzar, 2014)
Figure 2.5 SWOT Matrix Source: www.mba-lectures.com
SWOT matrix provides a conceptual framework for system analysis, so it can analyze the factors and comparisons, obstacles, threats, vulnerable aspects, opportunities, demands, and external environment situations as well as the strong and weak points of the designed strategy. After identifying the external factors and internal factors and separating the key factors from other factors, it’s time to select and recommend the strategies (Mirzakhani, Parsaamal, & Golzar, 2014). The SWOT Matrix helps company to come up with 4 types of strategies as can be seen in Figure 3.4 above, those strategies are:
- SO (strengths-opportunities) strategies: Use a firm’s internal strengths to take advantage of external opportunities.
- WO (weaknesses-opportunities) Strategies: Aim at improving internal weaknesses by taking advantage of external opportunities.
- ST (strengths-threats) Strategies: Use a firm’s strengths to avoid or reduce the impact of external threats.
- WT (weaknesses-threats) Strategies: Defensive tactics directed at reducinginternal weakness and avoiding external threats(David & David, 2015:206).
2.4.5 Internal and External (IE) Matrix
Figure 2.6 Internal-External (IE) Matrix Source: (David & David, 2015:217)
The IE Matrix determine based on two key dimensions: the IFE total weighted scores on the x-axis and the EFE total weighted scores on the y-axis. There are three major regions in this IE Matrix: 1. Grow and build 2. Hold and maintain 3. Harvest or Divest(David & David, 2015:218). It can be seen from Figure 3.5 which area that determine the position and action of the company, is it to grow and build or hold and maintain or harvest/divest. The Internal/External Factor Evaluation Matrix is a tool which helps the strategists to assess some factors such as environmental, economic, political, social, cultural, legal, and technological factors and the market status in determined period and it’s also applicable in governmental, private, and public organizations. Hence, it will be possible to determine the strategic situation of the
Quadrant III
- Must make some drastic changes quickly to avoid further decline and possible liquidation
- Extensive cost and asset reduction (retrenchment) should be pursued first Quadrant IV
- Have characteristically high cash-flow levels and limited internal growth needs and often can pursue related or unrelated diversification successfully (David & David, 2015:219-220).
2.4.7 Quantitative Strategic Planning Matrix (QSPM) Quantitative Strategic Planning Matrix (QSPM) is the only technique of analysis designed to determine the relative attractiveness from various alternatives. QSPM determines relative attractiveness from some available strategies built on critical internal and external success factors. Then relative attractiveness of each strategy is calculated by determining the cumulative impact of each critical internal and external success factors(Rumanti & Syauta, 2013).
Figure 2.8 QSPM Matrix Source: www.mba-tutorials.com
Quantitative Strategic Planning Matrix (QSPM) objectively indicates which alternative strategies are best to the company as illustrated in Figure 3.9 the strategy options are market development and market penetration. This matrix uses input from Stage 1 analyses and matching results from Stage 2 analyses to decide objectively among alternative strategies. There are several steps for doing this QSPM matrix:
- Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column of the QSPM
- Assign weights to each key external and internal factor
- Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing
- Determine the Attractiveness Scores (AS)
- Compute the Total Attractiveness Scores
- Compute the Sum Total Attractiveness Score In the example in Figure 3.9 shows the total attractiveness of market penetration is 4.7 and the total attractiveness of market development is 3.85, it means the analysis indicates that the company should use the market penetration strategy. If a particular factors influence one strategy but not the other strategy it affects the choice being made, so attractiveness scores recorded on both sides and always rate all strategies. If you have more than one strategy in the QSPM you should set the AS scores range from one to the number of strategies being evaluated, it will helps you to have a different AS score for each strategy (David & David, 2015:221-225).
