External environment aims to help an organisation to obtain opportunities and threats that will affect the organisation’s competitive situation. External opportunities are characteristics of the external environment that have the potential to help the organization achieve or exceed its strategic goals. External threats are characteristics of the external environment that may prevent the organization from achieving its strategic goals. Therefore, organisations must formulate appropriate strategies to take advantage of the opportunities while overcome the threats in order to achieve their strategic goals.
The external environment consists of variables that are outside the organization and not typically within the short-run control of top management. They may be general forces within the macro or remote environment, which consists of political-legal, economic, socio-cultural, technological forces – usually called PEST. Political-legal force influences strategy formulation through government and law intervention. For example, the environment law requires the world’s automobile manufacturers to reduce emission of green house gasses, and therefore these manufacturers have to reformulate their product strategy.
Economic force influences strategy formulation through economic growth, interest rates, exchange rates and the inflation rate. For example, exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy, and thus influence strategy formulation of exporters. Socio-cultural force is about the cultural aspects, health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social-cultural factors affect the demand for a company’s products and how that company operates.
For example, increasing health consciousness can influence strategy formulation of fast-food companies that may have to adopt product innovation strategy. Technological factors include technological aspects such as R;D activity, automation, technology incentives and the rate of technological change. For example, rapid development of the information technology has significantly influenced the strategy formulation of logistics service providers who are now able to provide superior express services.
There may be specific forces within the micro or near environment, which involves analyzing the threat from the new entrant, rivalry among the existing players, pressure from the buyers, pressure from the suppliers and pressure from the substitutes. This is introduced in Porter’s Five-Forces Model. Profitable markets that yield high returns will attract new firms which eventually will decrease profitability for all firms in the industry unless the entry of new firms can be blocked by incumbents. The existing firms therefore need to formulate new strategies against potential entrants.
For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. For example, high intensity of competitive rivalry in the automobile industry forces competitors such as Ford, Honda, to form strategic alliances or adopts the strategy of M;A. The bargaining power of buyers is the ability of customers to put the firm under pressure. For example, strong bargaining power of buyers in the computer industry put Dell under pressure. To deal with such pressure, Dell has to focus on relationship marketing strategy by offering value-added services to its customers.
The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or charge excessively high prices for unique resources such as Microsoft software and Intel chips which affects the formulation of price strategy of PC makers. The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives.
In order to retain customers, companies must formulate appropriate strategies to compete with the substitutes. For example, milk producers compete with soy milk producers. However, strategy formulation is also influenced by the degree of turbulence of the external environment. A high degree of turbulence exists if changeability is high and predictability is low. Companies need to formulate strategies based on the planned prescriptive approach if turbulence is low, whereas based on the unplanned emergent approach if turbulence is high.
How organization’s overcome environmental changes? Organisations need to deal with environmental changes with appropriate strategies. First, organisations may choose to wait and see. Such strategy has its advantages and disadvantages. For example, facing a significant technological change, some companies may choose to integrate the new technology into their products. If they are successful, the rest companies’ ‘wait and see’ strategy is obviously unwise. However, if they failed, the rest companies’ ‘wait and see’ strategy appears wise.
As a result, strategic decision making is impacted on and opportunities may either be lost or capitalised on. Second, organisations may choose to change in response to environmental changes through either proactive or reactive. Proactive change involves actively attempting to make alterations to the work place and its practices. Companies that take a proactive approach to change are often trying to avoid a potential future threat or to capitalize on a potential future opportunity.
Reactive change occurs when an organization makes changes in its practices after some threat or opportunity has already occurred in the external environment. As an example of the difference, assume that a hotel executive learns about the increase in the number of Malaysians who want to travel with their pets. The hotel executive creates a plan to reserve certain rooms in many hotel locations for travelers with pets and to advertise this new amenity, even before travelers begin asking about such accommodations. This would be a proactive response to change because it was made in anticipation of customer demand.
However, a reactive approach to change would occur if hotel executives had waited to enact such a change until many hotel managers had received repeated requests from guests to accommodate their pets and were denied rooms. In reality, companies may use a combination of both proactive and reactive approaches. Proactive approach is highly common when an industry is new with little or no change. The bellwether company entering the industry is making all of the strategic decisions or being proactive. However, because of its success, competitors gradually enter the market, resulting in the turbulent change of the competitive environment.
Consequently, the reactive change is on the part of the new competitors as well as the bellwether company. To overcome environmental changes, companies may also choose the merger or acquisition strategy. A merger is defined as the joining of two or more organizations to constitute a new combined, legal entity. An acquisition is defined as the purchase of more than 50 percent of the voting shares of one organization by another, but the two organizations are still separate legal entities with the acquiring organization running as the parent company and another as a subsidiary.
For example, recent study discloses that the merger and acquisition strategy in the global automobile industry will be further enhanced in the near future in order to deal with the threat of global financial crisis which decreased the consumers’ disposable income and increased the debt of auto makers and suppliers that have to save their organisations through merger and acquisition Ddiscuss the importance of organisational culture in strategy implementation
Organisational culture can be defined “as the system of shared beliefs and values that guide and direct the behaviour of members, can have a strong influence on daily organisational behaviour and performance. ” (1) Reflection to leadership Successful strategy implementation needs strategic leadership. Strategic leadership is the ability of influencing others to voluntarily make decisions that enhance prospects for the organisation’s long-term success while maintaining short-term financial stability.
It includes determining the firm’s strategic direction, aligning the firm’s strategy with its culture, modelling and communicating high ethical standards, and initiating, shaping and implementing changes in the firm’s strategy, when necessary. Strategic leadership sets the firm’s direction by developing and communicating a vision of future and inspires the organization’s members to move in that direction. (2) Enable to create mission & vision The vision is the source and the main idea of a company. The mission aims to give the direction which presents the unique scope of business, its vision nd specific competence & competitive advantages, and to tell employees, consumers, and shareholder what the firm is. For example, IBM’s vision is: solutions for a small planet. Mission is: At IBM, we strive to lead in the invention, development and manufacture of the industry’s most advanced information technologies, including computer systems, software, storage systems and microelectronics. Create a shared vision to manage strategic change: objectives and vision of both individuals and organization should coincide. There should be no conflict between them.
Senior managers need to constantly and consistently communicate the vision not only to inform but also to overcome resistance through proper communication. Strategy implementers have to convince all those concerned that the change is not superficial. The actions taken have to be credible, highly visible and unmistakably indicative of management’s seriousness to new strategic initiatives and associated changes. (3) Help to create a better strategy (4) Staff motivation Strategy implementation requires special motivation to achieve objectives.
The motivation system functions according to the qualities and mechanisms of motivation, which is developed during the stage of entry strategy preparation. First and foremost, this system has to inspire employees involved in the process of strategy development and implementation to orient their mindset toward a strategic way of thinking. Formalizing the strategic motivation system includes establishing a system of daily incentives for employees, especially those who are responsible for strategy development and implementation.
The formal system is presented in a document, where all suggestions about motivation and incentives are developed and described. It includes all moral, social, and financial instruments of motivation of individual employees and groups of employees. Special recognition and awards should be given to those who go above and beyond in creating and implementing strategic ideas. (5) Increase or enhance adaptability skills How to use organisation culture to develop competitive advantages 1. Develop CA An organization that is able to maintain a positive culture is likely to enjoy many benefits.
When organization members identify with the culture, the work environment tends to be more enjoyable, which boosts morale. This leads to increased levels of teamwork, sharing of information, and openness to new ideas. The resulting increased interaction among employees activates learning and continuous improvement because information flows more freely throughout the organization. Additionally, such a culture helps to attract and retain top employees. For example, Wal-Mart’s founder, Sam Walton, showed concern and respect for his employees from the company’s inception.
This created an environment of trust that persists to this day. Walton also modeled the behavior that he desired from his employees, especially customer service (both to internal and external customers), by visiting his stores, meeting customers, and greeting employees by their first names. Walton also embraced and encouraged change in order to remain competitive, and developed employees by having them work in a variety of positions. Wal-Mart considers its culture the key to its success, and to this day employees continue to think about “how Sam would have done it’’ when making decisions. 2.
Proactive ; reactive Today’s globally-competitive business environment has made a positive corporate culture a critical aspect of success for firms. No longer just a competitive advantage, it has become a prerequisite for success, allowing companies to attract and retain top employees. Therefore, where the culture is serving to lower morale, it is recommended that management take proactive rather than reactive steps to change the corporate culture using a top-down approach, establishing a new vision and demonstrating new behavior consistent with the revised vision. 2. Ability to change 3. Strong learning curve