Validity and applicability of tools in industry analysis


We discussed many tools of industry analysis during the module on Strategic Management and I would like to review this question from macro (PEST analysis) and micro (Porter`s Five Forces) view on the company`s external audit. I think, it would be very applicable to analyze company`s activity from the position of broader economic environment by using PEST analysis and from more integrated position of company1s activity by using Porter`s Five Forces.

Analysis of the external environment is one of the main elements in the strategic management process, because it provides a basis for determining the mission and goals of the company and to develop strategies of behavior, allowing the company to carry out its mission and achieve its goals. So, one of the key roles of any management is to maintain a balance in the process of external scanning, because each company is involved in many important external interactions.

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From my point of view, scanning of the external environment involves the analysis of its two components: macro- and microenvironment. The managers should use different tools of external audit for these two components, because the main goal of the strategic management is the choice of the right strategy and anticipation of risks.

External audit (macro environment) includes the analysis of the influence of macro-economics, regulation and governance, political processes, environment and resources, social and cultural components of society, scientific and technological development of society, infrastructure, etc.

The managers can use the PEST analysis in order to analyze the main factors, which influence on the company`s activity in this macro environment. The factors of macro environment have different and changing influence on the business strategy. The causes and consequences of these changes should be considered in relation to their impact on competitive positioning.

From my point of view, PEST analysis is a very useful toll of external audit, because we can apply it in analyzing of the company's market position, its capabilities and areas of business. Also, we can apply it in developing of a marketing plan as a tool of macroeconomic analysis of the environment and available resources. The results of the analysis allow us to estimate the external economic situation evolving in the production and business activities.

But the PEST analysis provides us only with information about external macro environment and it won`t be a complete external audit without analysis of the microenvironment. The analysis of the microenvironment includes the analysis of suppliers, consumers, direct competitors, labor market and financial market.

Analysis of suppliers is aimed at identifying those aspects (various raw materials, intermediate products, energy and information resources), on which depends the company's performance, cost and quality of manufactured product. Suppliers of materials and components, if they have a great competitive force, can put an organization at a very high dependence. Therefore, when selecting suppliers it is important to thoroughly and comprehensively analyze their activities and potential in order to be able to build a relationship with them, which would provide the company with a maximum force in collaboration with suppliers. It depends on such factors, as:

The degree of buyer`s specialization to purchase certain resources;

The suppliers focusing on work with certain clients;

The importance of sales volume for the supplier.

The analysis of consumers focuses on the drawing up the profile of those people who will buy a product that is manufactured by the company. This analysis helps us to extend the range of consumers, find out more about their commitment to our product and the sales volume.

The analysis of competitors, i.e. those with whom the organization has to compete for customers and for the resources in order to ensure its existence, occupies a special and very important role in strategic management. This analysis helps the company to identify the strengths and weaknesses of competitors and this analysis provides us with the basis for build the right strategy of competition.

But all this analysis would be nothing, if we cannot summarize data from it. That why, it is important to use different tools of external audit. Obviously, we can use Porter`s Five Forces. This tool is applicable in such situation when we want to analyze company`s microenvironment. We can summarize our data in Porter`s Five Forces tool in order to be competitive in our business segment and influence on the business processes in our favour.

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In our case, the First Force focuses on the risk of the new entrants to our market. It is obvious that new competitors create the threat to our revenues. The competitive strength of this factor depends strongly on the barriers to entry. There are three main sources of such barriers:

The loyalty of the consumers to the company`s brand;

The absolute advantage on costs;

The economy of scale.

The Second Force is rivalry of existing companies in the industry. There are three factors in this aspect: the structure of industry competition, demand conditions, the height of exit barriers in the industry. The structure of industry competition depends on the degree of consolidation in the industry (whether it is fragmentary or there are conditions of oligopoly or monopoly). The growth of demand leads to a moderate competition in the industry by the provision of greater opportunities for expansion.

The Third Force is the ability of companies to 'bargain'. Buyers (companies) are most powerful in the following situations:

They make a purchase in large quantities;

The industry consists of many small businesses, and there a little number of buyers or these buyers are large corporations;

The buyers can choose between supplying segments by using the minimum prices criteria.

The Fourth Force is pressure force from the suppliers. It is their threat to raise prices, forcing companies to reduce the number of products supplied, and, consequently, their revenue.

The Fifth Force is the threat of substitute products. The existence of completely substitute products is a serious competitive threat, limiting the price of the company and its profitability. However, if the company's products are not fully substitute, then the companies are able to raise prices and gain extra profit, and their development strategies should use this fact.

2. How would you approach internal audit of a department store?

Internal audit reveals the opportunities, which the company can expect in order to compete in the business process and achieving its goals. Analysis of internal environment allows a better understanding of goals and efforts, to formulate more efficient mission, i.e., determine the meaning and direction of the company`s development strategy. It is always extremely important to remember that the company not only manufactures products for the consumers, but also provides a possibility of their employees by giving them jobs, giving the opportunity to participate in the profits by providing them with social guarantees, etc.

I would begin the internal audit of the department store from the analysis of its mission and goals, because it is the most important step in the process of strategic management. The company`s mission is the basic philosophy of the company. The company`s mission gives staff the understanding of goals and assists in formulating a common position that fosters an organizational culture.

It is hard summarize the universal rules of a mission statement, but we must consider the mission of the company in terms of identifying the basic needs of consumers, and their effective satisfaction. But let`s make the internal analysis of the department store by following P.Kothler. So, we should analyze in the department store mission its main features, such as:

1. The company's history, during which was elaborated the philosophy of the company, was formed its profile and style of business, its role on the market, etc.;

2. The existing style of behavior and method of action of the owners and management staff;

3. The state of company`s business environment;

4. The resources which the company can operate to achieve its goals;

5. The features which the company possesses.

If the mission defines common reference points, directions of company`s functioning, which express the sense of its existence, then the specific final business state of the company focuses on its goals. From my point of view, the company`s goal - it is a concrete state of individual characteristics of the company, achievement of which is desirable for the company and towards which its activities are directed.

We should analyze this aspect of the company`s strategy very carefully, because company`s goals are the starting point for planning, they form the basis for constructing of organizational relationships, they are the basis for motivation system, used in the company, finally, they are a starting point in the process of monitoring and results evaluation of work of individual employees, departments and company in general.

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Also, we should take into account in our internal audit the time period, because depending on the time period necessary to achieve them, the goals are divided into long and short term. In principle, the basis of goals division on these two types is the time period associated with the duration of the production cycle. Goals that expected by the end of the production cycle are long term. So, the time intervals should be different to achieve long-term goals in various industries. However, in practice it is usually considered short-term goals to be achieved within one to two years, and, accordingly, long-term - goals to be achieved through a three - five years.

After we analyzed the department store mission and goals, we should use another strategic tool, such as McKinsey 7s. This tool is very important in our internal analysis, because it will provide us with useful data about structure, systems, staff, style, strategy, skills and shared values.

It is very important to analyze the structure of the department store, because we can review the grouping of businesses spheres, divisions and departments in relation to each other. Probably, it is also the most visible factor in the company, and that is why often there is a temptation to start with changes in the structure. There are many examples of corporate management, which believed that it could reorganize its company solely by changes in structure.

We should analyze in systems segment of the department store, the procedures or processes that exist in the company and affect a large number of people with a goal of identifying of major problems, implementation of projects or decision-making. Systems greatly influence on the processes in the company and provide management with a powerful tool for development.

The Staff segment is connected with the question what kind of people is necessary to the company. It's not so much a matter of individual personalities, but rather a general know-how possessed by company staff.

Also, the style segment is one of the least known tools of the company leaders. We can say that it consists of two elements: personal style and symbolic actions. Form my point of view, this segment depends on the behavior of the company leaders.

Finally, the shared values are the basis for the success and development of the company.

After that, from my point of view, it is important to analyze department store`s value chain in the process of internal audit.

I would like to determine department store's primary activities, which we should analyze. These activities are:

1. Marketing and sales. This activity involves acquainting consumers with a product or service, and also includes solutions to the pricing of the goods, market promotion, dealer support, etc.

2. Customer service. This activity is aimed at improving or preserving the value of a product or service and includes a pre-sale training, service in shops, after-sales service, repairs, etc.

3. Production. This activity consists of actions such as processing, assembly, quality control, etc., and its main function is to transform the original resources into the final product or service.

4. Research and Development. This activity is associated with the creation of value: technological processing, product development, management of raw materials flows.

Also, it is important to analyze supporting activities. From my point of view, these activities are:

1. Material management. The events include the acquisition of resources (components of manufacturing process).

2. HRM, actions, which include recruiting, training, development and promotion of staff.

3. Company infrastructure: maintenance, ensuring the normal flow of the production process. It includes buildings, communications equipment, product, etc.

4. Information systems. This activity is connected with supporting and maintaining of department store's sales.

3. Describe shortly a managerial control system that you know well. To what extent is it coping with the 'complexity' it seeks to control? What are the implications in case of it's failure? How and what would you like to change?

From my point of view, control - is one of the major functions of management, which is a process of the company's goals achieving, implementation of management decisions. The management of the company can determine the rightness of their decisions and establish the need for their correction by using control measures.

I would like to shortly describe the management control system of the manufacturing company. This management control system implements following functions, such as:

1. Organizing and implementation of management decisions or orders execution and administrative documents of the company;

2. Providing the company's management with operational information on the progress and results of the assignments, organizing and analyzing of materials related to the execution of orders and company's business processes;

3. Enforcement of CEO orders or assignments and implementation of received applications;

4. Ensuring compliance with the established order of work.

But each system has its own limitations and I would like to describe these limitations in case of its failure.

There is no subsystems control, but the validity and implementation of such control determines the efficiency of the management system as a whole.

The regulation of control procedures in the company is limited to a description of the company's internal control functioning and procedures for collecting information for the purpose of reporting (final control). There is no procedures description for the preliminary control, which includes gathering of the operational information on control points.

The company `s staff are not always sufficiently prepared to perform analytical workflow. This fact leads to the problems in strategic planning. The consequence is a lack of training and reasonableness of decision-making process. If there is no clear policy of control over experts work and analysis of their suggestions, then there may appear inconsistent and even controversial solutions. The increased complexity of the strategic problems requires the presence of specialists in decision-making process.

There is no document which describes the structure, it is approved, and however, the degree of detailed elaboration is not enough in the company. This is a serious obstacle to the efficient allocation of functions between departments. Such documents are a part of the control environment. Also, such documents regulate the activities of departments of the company and individual professionals (regulations, instructions), part of which are undeveloped or non-confirmed. There is no uniformity in the standard presentation of information; there are no interconnected regulations in the company. Finally, the quality of information in the regulations is poor.

So, I would like to propose following changes in order to improve this system.

There should be implementation of subsystems control, because the success of the company depends on such control. The overall supervision should be delegated to the heads of departments.

It is extremely necessary to keep high quality level of formalization for efficient management system as a whole and for the internal control system in particular. The formalization should begin with analysis of the company's organizational structure. I have got some recommendations for it:

- The management decisions related to change of any organizational structure, have a positive effect only in the long-term period. The change of one organizational structure to another in short-term period leads to transforming of the positive effects of economic activity to losses;

- The implementation of systematization of existing and inactive regulations and instructions;

- The documents establishing the organizational structure of the company should contain details about all structural formations, show the subordination of units in management structure, describe the principal functions of the structural units;

Also, it is important for implementation of management control system functions to follow further instructions, such as:

1. The management control system should be designed and operated strictly within the approved organizational structure and framework of functions of the company's departments.

2. It is important to take into account that the management control system is largely limited by the physiological capabilities of the company's stuff.

3. The management control system has also another important component - measuring performance. General Director and head of departments should focus on providing of fair employee evaluations. This will help the development of performance evaluations, which will provide the company with accurate analysis of productivity.

Finally, I would recommend to invite a manager, who will perform certain functions, including design, compose and offer management solutions, or, for example, proposals to improve procedures for making administrative decisions.

4. You are strategy expert called by HTC corp in the end of the case we studied in class to make a recommendation on whether HTC should create its own OS or not. Please outline strategic options, make your decision, and explain your line of thinking.

HTC Case is very remarkable case, because it shows us the situation in which the company faced the need of strategy change. This corporation has to choose between creation of own Operating System or not. But what are the options?

As a strategy expert, I would outline three main strategic choices for the company. These strategic choices are partnership with Microsoft or Google and developing operating system, which will be based on the own design efforts.

HTC had the partnership with Microsoft in the past. It developed PDA that was based on Microsoft Windows platform. Then HTC and Microsoft collaborated in the development of smartphones that also were Windows-based. It was really a great cooperation for further improvement of products. But there was a decrease in revenues for the corporation facing competition from Google Corporation. HTC had to pay a big amount of money for the licensing to Microsoft and it is a disadvantage of such a partnership. HTC is famous for its innovation and creativity, but Microsoft has many complaints, concerning its efforts in Mobile segment.

Then, HTC begin a partnership with Google. HTC can use Google's open platform Android, which has the potential for growth and implementation in any network. The great advantage of this operating system is its freedom from licensing. It is a popular system with a media attention. HTC and Google are very similar corporations, because they are on the front-line of innovations. But HTC will depend on Google efforts.

The third option is the creation of its own operating system. HTC has much experience in creation of software, but this corporation was always dependent concerning operating systems. HTC will get a great benefit from the creations of its own OS, because HTC will have the full control over its products. Also, HTC can prove its creative by doing that, but it will be very expensive and it will face a lot of competition from the former partners.

I would recommend HTC to cooperate with Google, concerning on above-mentioned analysis and further arguments. HTC should focus on economies of scale. Also, it will be important for the company take into account two approaches of growth, such as: market development (focusing on branding of new products, concerning existing markets) and product development (existing product, new markets). These two approaches will be the best for the innovative HTC strategy.

The software market is very competitive. So, HTC should make investments in cooperation in order to obtain operating system instead of creating own operating system.

The cooperation with Google, concerning Android platform, will be right for HTC mobile phones and smart phones. There will no licensing fee for using this platform. This platform is growing and becoming more popular, so HTC should use this advantage in order to promote and develop its products. Also, I would recommend HTC to cooperate with Android in its application stores, because it will save cost and time for HTC corp.