MGE Textbook - Bachelor Exam PDF 2024

Ch. I. Managernent in organizations 1.1. Introduction to management 1.1.1. Manager's job §I. What is 1nanage1nent? §2. Who is a 1nanager? § 3. The functions of manage1nent §4. The process of 1nanagement §5....

Ch. I. Managernent in organizations 1.1. Introduction to management 1.1.1. Manager's job §I. What is 1nanage1nent? §2. Who is a 1nanager? § 3. The functions of manage1nent §4. The process of 1nanagement §5. Managerial roles §6. Manager's work 1.1.2. Organizational environments § l. The external environ1nent §2. The internal environ1nent §3. Analyzing environmental conditions 1.2. Planning 1.2.1. Establishing organizational goals and plans § 1. The overall planning process §2. Organizational goals §3. Organizational plans 1.2.2. Managing innovation and change § I. The nature of change and innovation §2. Organizational life cycles §3. The change and innovation process §4. Key organizational change components §5. Organizational development 1.2.3. Decision 1naking § I. The nature of managerial decision making §2. Differences in decision-making situations §3. Managers as decision 1nakers  §4. Overcoming barriers to effective decision making §5. Group decision n1aking § 6. The creativity factor in decision making 1.3. Organizing 1.3. l. Organizational structure § 1. The nature of organization structure §2. Job design §3. Types of depart1nentalization §4. Methods of vertical coordination §5. Methods of horizontal coordination 1.3.2. Organization design §I. Designing organization structures: an overview §2. Functional structure §3. Divisional structure §4. Hybrid structure §5. Matrix structure §6. Weighing contingency factors Ch. 1. Management in organizations 1.1. Introduction to management 1.1.1. Manager'sjob §1. What is management? An organization is a group of people working together in a structured fashion to attain a set of goals. This organization may be a company, but also a sport club, a university, a church etc. Every time two or more persons are engaged in a systematic effort to accomplish an activity, they are an organization. Management is the process of administering the activity of one organization or of one division of that organization.To managemeans to handle, to be in charge of, to control, to administer that activity. Frederick Winslow Taylor ( I 856-1915), the "father of scientific management", defined management as knowing exactly what you want people to do, and then seeing that they do it in the best and cheapest way. The word management comes from two Latin words, manus (hand) and agere (to drive, to act), resulting manum agere (to drive by hand, to handle). The word became maneggiare (to handle, especially a horse) in the old Italian, then mesnagement (later menagement; to care) in the old French, from where it was borrowed in English and became management. Nowadays this word is used in all languages, including French and Italian. Another important pioneer in management thought, Henry Fayal (1841-1925), defined management by naming its major components: to manage is to forecast and plan, to organize, to command, to coordinate and to control. This was the first approach to the functions of management. The contemporary approach is a little different: forecasting is only a means used in planning; I· commanding is replaced by leading (which has a dramatically wider meaning); and coordinating is not only a function, but the core part of management, being exercised through all the functions. Thus the four functions of management are planning, organizing, leading and controlling. Considering these four major components, we may define management as the process of achieving organizational goals by engaging in the four jimctions of planning, organizing, leading, and controlling(Bartol & Martin, 1994, p. 6). ln fact, the word management has different meanings: ✓ The act (activity) of managing something. r. ✓ The group of top managers of one organization. i'  ✓ People in charge of running a business. Management is performed through the deployment and manipulation of resources.Organizational resources are:human, financial, physical, and information. ✓ Human resources are the people needed to get the job done. ✓ Financial resources are the money the organization uses to reach its goals. The financial resources of a business organization are profits and investments from stockholders, and, occasionally, cash borrnwed for different purposes. ✓ Physical resources are a firm's tangible goods and real estate, including raw materials, office space, production facilities, office equipment, and vehicles. ✓ l1iformation resources are the data that the organization uses to get the job done. Many authors talk also about two additional resources: intellectual and intangible, pointing to human thoughts and feelings, beyond the professional knowledge and skills addressed by human resources. §2. Who is a manager? A manager is someone whose primary activities are a part of the management process(Griffin, 1990, p. 7).Please notice that this does not mean that the manager has subordinates - a manager in not necessarily a leader, but a person who is administering one activity. Anyway, a manager is usually a head of a work unit or department, or the head of the entire organization, so he/she is the person re ponsible for the work performance of group members(DuBrin, 2009, p. 2). A manager holds the authority (the formal power) to commit organizational resources, even if the approval of others is required.In fact, a manager is someone who has a measure of control over any of the following: time, workloads, decisions, technology, equipment, money, standards, meetings, and/or other people. There are many managerial job types in any organization. These managerial jobs vary on the basis of two important dimensions (Figure 1): ✓ A vertical dimension, focusing on different hierarchical levels; ✓ A horizontal dimension, addressing variations in managers' responsibility areas...' I Along the vertical dimension, managerial jobs fall into three categories: top, middle, and first-line management. 1. Top managers are managers at the very top levels of the hierarchy. They are ultimately responsible for the entire organization and have direct responsibility for the upper layer of middle managers. Top managers' typical titles are: chief executive officer (CEO), president, executive vice president, executive director, senior vice president. They are often referred to as executives. I 1·  Top QJ = QJ Ill - bl) aJ ro > C 41 ro E G.... ·- 0 managers -6.!!! C!... QJ > 41 ni ·e First-line managers ca..,C tlO bJl QJ u Ill) C ro C: C: C: QJ ·c :.:; C ro ·.:; E u E L. Cl. QJ QJ.,,, QJ L. C C :::i :i:: :::i 0 0 C ro u: 0 u QJ VI - OJ OJ a: OJ > 'iii> C: u pan of management (or the span of control) is the number of subordinates who report directly to a specific manager. With too many subordinates, managers become overloaded, experience difficulty coordinating activities and lose control of what is occurring in th eir work units. With too few subordinates, managers are underutilized and tend to engage in excessive supervision, leaving subordinates little discretion in doing their work. Spans of management can be wider under the following conditions(Daft & Steers, 1986, p, 294): ✓ Low interaction requirements. ✓ High competence levels. ✓ Work similarity. ✓ Low problep1 frequency and seriousness. ✓ Physical proximity. ✓ Few nonsupervisory duties of manager. ✓ Considerable available assistance. ✓ High motivational possibilities of work. Spans of management for various managerial positions directly influence the number of hierarchical levels in an organization. A tall structure is one that has many hierarchical levels and narrow spans of control. A flat structure is one that has few hierarchical levels and wide spans of control. Because of various problems with tall structures, many companies have been downsizing. Downsizing is the process of significantly reducing the layers of middle management, increasing the spans of control, and shrinking the size of the work force. A closely related term that is often used synonymously with "downsizing" is "restructuring". Restructuring is the process of making a major change in organization structure that often involves reducing management levels and possibly changing components of the organization through divestiture and/or acquisition, as well as shrinking the size of the work force. Centralization is the extent to which power and authority are retained at the top organizational levels. The opposite of centralization is decentralization, the extent to which power and authority are delegated to lower levels. The most important positive aspects of centralization are: ✓ It is easier to coordinate the activities of various units and individuals. ✓ It helps ensuring that similar activities are not carried on by different organizational units. ✓ Top managers usually have the most experience and may make better decisions. ✓ Top managers usually have a broader perspective and can better balance the needs of various organizational parts. ✓ It promotes strong leadership in an organization because much of the power remains at the top. The most important positive aspects of decentralization are: ✓ It eases the heavy workloads of executives, leaving them more time to focus on major issues. ✓ It enriches the jobs of lower-level employees by offering workers the challenge associated with making decisions. ✓ It leads to faster decision making at the lower levels. ✓ Individuals at lower levels may be closer to the problem and, therefore, in a better position to make good decisions. ✓ It often leads to the establishment of relatively independent units, such as divisions. Four main factors lead to decentralization: (1) large size, (2) geographic dispersion, (3) technological diversity, and (4) environmental uncertainty. Delegation is the assignment of part of a manager's work to others, along with both the responsibility and the authority necessary to achieve expected results.Responsibility is the obligation to carry out duties and achieve goals related to a position. Authority is right to make decisions, carry out actions, and direct others in matters related to the duties and goals of a position. Accountability is the requirement to provide satisfactory reasons for significant deviations from duties or expected results. President Staff Services: Information systems Human resources Vice President Vice President Vice President Vice President Vice President Operations Marketing Investments Tru t loans, Region 1 Corporate Corporate Consumer Region 1 Retail Personal Commercial loan Servicing line positions Line authority Staff positions Functional authority Figure 21. Line and staff departments of a bank Source: (Daft & Steers, 1986, p. 300) A line position is a position that has authority and responsibility for achieving the major goals of the organization. Line departments have line authority, which is authority that follows the chain of command established by the formal hierarchy (Figure 21). A staff position is a position whose primary purpose is providing specialized expertise and assistance to line positions. Staff departments have functional authority, which is authority of staff departments over others in the organization in matters related directly to their respective functions (Figure21). §5. Methods of horizontal coordination Horizontal coordination is the linking of activities across departments at similar levels.Three major means that are particularly useful in promoting horizontal coordination are (I) slack resources, (2) information systems, and (3) lateral relations. Slack resources are a cushion of resources that facilitates adaptation to internal and external pressures, as well as initiation of changes. An information - J1ste111 is a set of procedures designed to collect (or retrieve), process, store, and disseminate information to support planning, decision making, coordination, and control. Lateral relations are the coordination of efforts through communicating and problem solving with peers in other departments or units, rather than referring most issues up the hierarchy for resolution. J.3.2. Orga11ization design Managers need to take a strategic approach to designing organizations, assessing alternative structures, and considering contingency factors that have an influence on the effectiveness of structural choices. §1. Designing organization structures: an overview Which com s first: strategy or structure? Major companies generally follow a pattern of strategy development and then structural change, rather than the reverse. Nevertheless, organizations often change their strategies in order to better utilize their resources to fuel growth. Contingency factors: --- ✓ Technology ✓ Size ✓ Environment Organization structure: I STRATEGY r---- ✓ ✓ ✓ Functional Divisional Hybrid Organizational goals (efficiency and effectiveness) ✓ Matrix Structural methods for promoting innovation Figure 22. Factors influencing organization design Source: (Daft & Steers, 1986, p. 312) Having a certain strategy, the effectiveness of a particular type of structure is also influenced by certain contingency factors, such as the dominant type of technology used or the organization's size. The major components influencing the design of effective organization structures are presented in Figure 22. There are four major types of structures, according to the types of departmentalization: functional, divisional, hybrid, and matrix. They are often referred to as organization structures or organization designs. Each type has advantages and disadvantages, and it's the fittest in certain conditions. §2. Functional structure Functional structure is a type of departmentalization in which positions are grouped according to their main functional (or specialized) area - positions are combined into units on the basis of similarity of expertise, skills, and work activities (Figure 23). President Vice Vice Vice Vice Vice Vice President President Presldent President President President Operations Finance Sales R&D Marketing HR Figure 23. Functional structure The common functions are: 1. Production (operations): combines activities directly related to manufacturing a product or delivering a service. 2. Marketing: focuses on the promotion and sale of products and services. 3. Research and development (R&D): responsible for producing unique ideas and methods that will lead to new and/or improved products and services. 4. Finance: concerned with obtaining and managing financial resources. 5. Accounting: deals with financial reporting to meet the legal matters affecting the organization. Accounting and finance are often referred to as a single function. 6. Human resources: responsible for attracting and retaining organization members and enhancing their effectiveness. Advantages of functional structure: ✓ In-depth development of expertise. ✓ Clear career path within function. ✓ Efficient use of resources. ✓ Possible economies of scale.  ✓ Ease of coordination within function. ✓ Potential technical advantage over competitors. l Disadvantages of functional structure: ✓ Slow response time on multifunctional problems. ✓ Backlog of decisions at top of hierarchy. ✓ Bottlenecks due to sequential tasks. ✓ Restricted view of organization among employees. ✓ Inexact measurement of performance. ✓ Narrow training for potential managers. Uses offunctional structure: ✓ Small or medium-size organizations: small and medium-size organizations that are not so large as to make coordination acrnss functions difficult - such organizations frequently have ,; a limited number of related products or services or deal with a relatively homogeneous set of I customers or clients, ✓ Stable environments: large or more diverse organizations, such as insurance companies, which operate in relatively stable environments in which change occurs at a slow enough rate for the various functions to coordinate their efforts. ✓ Inter-related products: large organizations when considerable coordination is required among products. §3. Divisional structure Divisional structureis a type of departmentalization in which positions are grouped according to similarity of products, services, or markets (Figure 24). President Vice President Vice President Vice President D[vlslon A Division B Plvlsion C Figure 24. Divisional structure There are three major forms of divisions: (1) product divisions, (2) geographic divisions, and (3) customer divisions. ,I. Product divisions are divisions created to concentrate on a single product or service or at least a relatively homogeneous set of products or services (Figure 25).  President Vice President Vice President Vice President Beverage Division Frozen Food Division Cereals Division Figure 25. Product divisions Geographic divisions are divisions designed to serve different geographic areas (Figure 26). President Vice President V)ce President Vice President Eastern Region Central Region Western Region Figure 26. Geographic divisions Customer divisions are divisions set up to service particular types of clients or customers (Figure 27). President Vice President Vice President Vice President Consumer Products Commercial Products Institutional Products Figure 27. Customer divisions Advantages of divisional structure: ✓ Fast response to environmental change. I ✓ Simplified coordination across functions. I ✓ Simultaneous emphasis on division goals. ✓ Strong orientation to customer requirements. ✓ Accurate measurement of division performance. ✓ Broad training in general management skills. Disadvantages of divisional structure: ✓ Duplication of resources in each division. ✓ Reduction of in-depth expertise.  ✓ Heightened competition among divisions. ✓ Limited sharing of expertise across divisions. ✓ Restriction of innovation to divisions. ✓ Neglect of overall goals. Uses of divisional structure: ✓ Large organizations with multiple targets: large organizations in which there are substantial differences among either the products or services, geographic areas, or customers served. §4. Hybrid structure Hybrid structureis a structure that adopts parts of both functional and divisional structures at the same level of management (Figure 28). President Functional departments -;::====-::::····::;:-::::----·::::·-·-=-::::- --:=11====:::::;:::=====;- ··----······--·· Function 1 Function 2 Function 3 Function 4 Geographic divisions Zone A Zone B ZoneC Figure 28. Hybrid structure Advantages of hybrid structure: ✓ Alignment of corporate and divisional goals. ✓ Functional expertise and/or efficiency. ✓ Adaptability and flexibility in divisions. Disadvantages of hybrid structme: ✓ Conflicts between corporate departments and divisions. ✓ Excessive administrative overhead. ✓ Slow response to exceptional situations. Uses of hybrid structure: ✓ Uncertain environments + jimctional expertise: organizations that not only face considerable environmental uncertainty that can best be met through a divisional structure but also require functional expertise and/or efficiency. ✓ Po,verful organizations: medium-size or large organizations that have sufficient resources to justify divisions as well as some functional departmentalization. §5. Matrix structure Matrix str11ct11reis structure that superimposes a horizontal set of divisional reporting relationships onto a hierarchical functional structure (Figure 29). President Matrix f' bosses 7 -- - , ----- -L-----. Manager f--.----1 Business A Two-boss employees Figure 29. Matrix structure Advantages of matrix structure: ✓ Decentralized decision making. ✓ Strong project or product coordination. ✓ Improved environmental monitoring. ! ✓ Fast response to change. ✓ Flexible use of human resources. ✓ Efficient use of support systems. Disadvantages of matrix structure: ✓ High administrative costs. ✓ Potential confusion over authority and responsibility. ✓ Heightened prospects for interpersonal conflicts. ✓ Excessive focus on internal relations. ✓ Overemphasis on group decision making. ✓ Possible slow response to change. §6. Weighing contingency factors The best structure for a given organization depends on such contingency factors as (I) technology, (2) size, and (3) environment. Technology is the set of knowledge, tools, equipment, and work techniques used by an organization in delivering its product or service. There are two critical aspects of technology: technological complexity and technological interdependence. According to technological complexity, there are three different types of technology and each one ' requires an appropriate organization structure: l _._.,.,...........  ✓ Unit and small-batch production: products are custom-produced to meet customer specifications, or they are made in small quantities primarily by craft specialist. ✓ Large-batch and mass production: products are manufactured in large quantities, frequently on an assembly line. ✓ Continuous-process production: products are liquids, solids, or gases that are made through a continuous process. Technological interdependence is the degree to which different pa11s of the organization must exchange information and materials in order to perform their required activities. There are three major types of technological interdependence: 1. Pooled interdependence: a relationship in which units operate independently but their individual efforts are important to the success of the organization as a whole. 2. Sequential interdependence: a relationship in which one unit must complete its work before the next unit in the sequence can begin work. 3. Reciprocal interdependence: a relationship in which one unit's outputs become inputs to the other unit and vice versa. Organization size is most typically measured in number of employees, but there are also other ways to measure it, such as gross sales or profits. There are four major trends identified of size effects on , structure: I. As organizations grow, they are likely to add more departments and levels, making their structures increasingly complex. With functional structmes, such growth creates pressure for a change to some type of divisional structure. 2. Growing organizations tend to take on an increasing number of staff positions in order to help top management cope with the expanding size. This tendency levels off when a critical mass of staff has been achieved, but it helps lead to the third trend. 3. Additional rules and regulations seem to accompany organizational growth. While such guidelines can be useful in achieving ve1tical coordination, the unchecked proliferation of additional rules and regulations may lead to excessive formalization and lower efficiency. 4. As organizations grow larger, they tend to become more decentralized. This is probably due in part to the additional rules and regulations that set guidelines for decision making at lower levels. The firms have different structural characteristics, depending on whether they operate in a stable or in an unstable environment. A stable environment is one with little change over time. An unstable environment has rapid change and uncertainty. There are two major issues related to the influence that environment has upon organization structure: (1) mechanistic and organic characteristics, and (2) differentiation and integration. Mechanistic and organic characteristics have effects on the organization as a whole: 1. The firms that operate in a stable environment tend to have relatively mechanistic characteristics: highly centralized decision making, many rules and regulations, mainly hierarchical communication channels, emphasis on vertical coordination, limited delegation from one level of management to the next. 2. The firms that operate in a highly unstable and uncertain environment are far more likely to have relatively organic characteristics: decentralized decision making, few rules and regulations, both hierarchical and lateral communication channels, much of the emphasis on horizontal coordination, considerable delegation from one level to the next. Differentiation and integration have effects on various units within the same organization: I. Differentiation is the extent to which organization units differ from one another in terms of the behaviors and orientations of their member and their formal structures. 2. Integration is the extent to which there is collaboration among departments that need to coordinate their efforts.  Chapter 2 2.1. Strategic Management Strategic Management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. Strategic management involves managing an organization's resources, analyzing internal and external forces, and developing strategies to achieve its vision and mission. Example It is no secret that Nike is one of the most well-known and recognizable brands today, not just in the athletic and apparel segments. Nike has transformed its company past a standard retailer into something much bigger, and it shows. The company raked in more than $46 billion annually (2022) and keeps growing. The vision of our company is “To bring Inspiration and Innovation to every athlete in the world.” “Our mission is what drives us to do everything possible to expand human potential. We do that by creating groundbreaking sport innovations, by making our products more sustainably, by building a creative and diverse global team and by making a positive impact in communities where we live and work.” “Our purpose is to unite the world through sport to create a healthy planet, active communities, and an equal playing field for all.” Organizations must be able to examine, understand, and codify what internal and external forces affect their business and goals, as well as what it needs to remain competitive. Analytical tools, such as SWOT analysis or IFE/EFE Matrix, are helpful during this phase. Its goals should answer what the company wants to achieve and why. Once set, the company can then identify the objectives, or how the goals will be reached. During this phase, the company can articulate its vision and long and short-term goals. Based on the results of the analysis, the company can then develop its strategy, outlining how the company will achieve its goals and how. In this phase, the company will identify the needed people, technology, and other resources, how these resources will be allocated to fulfill tasks, and what performance metrics are needed to measure success. It is also critical to gain buy-in from stakeholders and business leaders. Once the optimal strategies are identified and analyzed, it is time to take the strategy from planning level to implementation level. During this phase, the allocated resources are placed into action based on their roles and responsibilities. The final stage of strategic management is to evaluate the effectiveness of implemented strategies using defined metrics. The company will also visit whether ineffective strategies should be replaced with more viable ones. The company should continue to monitor the business landscape and internal operations, as well as maintain strategies that have proven effective. 2.2. The external environment The examination of the external environment involves compiling a list of potential advantages for a firm and identifying threats to be mitigated. It is not essential to enumerate all opportunities and threats; instead, attention should be directed towards key variables. The external environment comprises elements such as the general environment and the industry environment. 2.2.1 The General Environment The general environment includes external forces that do not directly affect short-term activities of firms but may influence long-term decisions making. Changes in external environment affect consumer demand, the nature of positioning and market segmentation strategies, the type of products and services offered and the choice of businesses to acquire or sell. ✓ Political and legal forces, which present both opportunities and threats for organizations, encompass factors such as environmental protection laws, alterations in tax regulations, import-export policies, political climates in foreign nations, and government regulations or deregulations. Given the escalating global interdependence among economies, markets, governments, and organizations, it becomes imperative for firms to assess the potential impact of political variables on the formulation and execution of competitive strategies. The trends in political and legal forces can significantly influence company strategies and the level of competition within an industry. For instance, the imposition of high taxes in Western European countries has prompted many firms to relocate elsewhere. ✓ Economic forces include interest rates, inflation rates, unemployment trends, economic conditions in foreign countries, monetary policies, fiscal policies, and worker productivity levels. When interest rates rise, capital expansion becomes more costly or unavailable, impacting firms' ability to invest. Additionally, rising interest rates can lead to a decline in discretionary income, affecting the demand for certain goods, such as electronic products. ✓ Social, cultural, demographic, and ecological forces: Increasing concerns for environmental protection and growing awareness of health maintenance have generated interest in resource reduction and healthier living. Changing consumer trends create a need for different products, services, and strategies. Examples include the rise of business opportunities in the fitness industry and the shift in consumer preferences towards healthier food products. Consideration of population structure and density, including the increasing market for the adult population, presents opportunities for firms to tailor their offerings to meet specific needs. As consumer preferences shift towards niche markets, the demand for products and services tailored to personal needs is increasing. Changes in life habits and living arrangements, such as the adoption of communication technologies, impact efficiency and contribute to population migration from crowded cities to quieter towns. ✓ Technological forces, such as AI, cutting-edge technology, licenses, etc. pose opportunities and threats. Industries like communications, electronics, aeronautics, and pharmaceuticals are more susceptible to technological changes than sectors like textiles, forestry, and metals. For industries affected by rapid technological changes, identifying and evaluating technological opportunities and threats is crucial for external environment analysis. An example includes the adoption of devices facilitating online transactions for consumers. 2.2.2 Industry Environment Competitive Intelligence is a systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’s own goals. An effective competitive intelligence program is essential for firms as it offers insights into industry dynamics, competitor vulnerabilities, and potential threats to market position. Competitive Intelligence Program is not a corporate espionage because 90 percent of the information a firm needs to make strategic decisions is available and accessible to the public. To perform an external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends.  Sources of strategic information: ✓ Surveys and Interviews - Surveys can generate abundant data on competitors and products, while interviews offer more in-depth perspectives from a limited sample. ✓ On-site observations involve examining competitors' parking spaces, ongoing construction, customer service at retail outlets, as well as the volume and patterns of suppliers' or customers' trucks. ✓ Defensive Competitive Intelligence entails monitoring and analyzing one's own business activities from an external perspective, as competitors would perceive them. ✓ Reverse Engineering competitor's products and services may provide crucial insights into their quality and costs, often involving the disassembly of products. ✓ Government Agencies can provide valuable data, albeit often requiring an excessive lead time. ✓ Searching Online Databases is a quicker and less expensive method for obtaining competitive information. ✓ Companies seeking types of data not widely available in databases can acquire such information by directly contacting the corporation. ✓ Competitive Benchmarking is employed to compare an organization's operations against those of its competitors. For more data on Competitive intelligence and AI: https://www.forbes.com/sites/cindygordon/2023/09/26/ai-driven- competitive-intelligence-accelerates-research-productivity/ After collecting information, it is essential to assimilate and evaluate it. Critical external factors should be recorded on flip charts or a chalkboard, and a prioritized list of these factors can be obtained by seeking the opinions of managers. For instance, relationships with suppliers or distributors often play a crucial role in achieving success. Other commonly considered variables include market share, the range of competing products, global economies, foreign affiliations, proprietary and key account advantages, price competitiveness, technological advancements, population shifts, interest rates, and pollution abatement. The final compilation of the most significant key external factors should be effectively communicated and widely distributed within the organization. It is important to note that both opportunities and threats can be classified as key external factors.  2.2.2.1.Porter’s Five-Forces Model of Competition The influence of industry competition intensity significantly shapes any firm, necessitating an assessment of the impact of each force on the firm's success. If one of these forces exhibits higher intensity compared to others, it poses a threat to the firm as it may result in reduced profitability. Porter's Five-Forces Model serves as a tool to determine whether competition within a particular industry allows a firm to achieve acceptable profits. This model involves: Identifying key aspects or elements of each competitive force that affect the firm. Evaluating the strength and significance of each element for the firm. Determining whether the combined strength of these elements justifies the firm's entry into or continuation within the industry. Fig. 1. Porter’s Five-Forces Model When evaluating the impact of competitive forces on a firm's success, it is crucial to recognize that weak competitive forces present opportunities, potentially leading to higher profits. In the short term, competitive forces act as constraints on business activities, but strategic shifts over the long term may alter the intensity of one or more forces in favor of the firm. The components of the Michael Porter Model are: Threat of New Entrants Identifying new entrants is essential as they can pose a threat to the market share of existing competitors. The threat depends on barriers to entry and the expected retaliation from current industry participants. Barriers include economies of scale, product differentiation, switching costs, access to distribution channels, and government policies. Examples: ✓ Economies of Scale: Intel Company benefits significantly from economies of scale in the production and sale of computers, giving it a cost advantage over new entrants. ✓ Product Differentiation: Procter & Gamble and General Mills create barriers to entry through powerful product advertising and promotion for Tide and Cheerios, respectively. ✓ Switching Costs: High costs associated with training employees on a new program can discourage the adoption of alternative software in an office using the SAP program. Intensity of Rivalry among Competitors The mutual dependence of firms within an industry often results in actions taken by one firm inviting competitive responses. The intensity of rivalry is influenced by factors such as the number of balanced competitors, slow industry growth, high fixed costs, lack of differentiation, size of production capacity, and high exit barriers. Examples: ✓ The competition between Coca-Cola and Pepsi in non-alcoholic beverages illustrates rivalry among firms of equivalent size and power. ✓ Slow Industry Growth: Intense rivalry is observed in slow-growth markets as firms vie to increase market shares. ✓ High Fixed Costs: Industries with high fixed costs often experience heightened competition as firms seek to maximize the use of their productive capacity. ✓ Lack of Differentiation: In markets where products are perceived as standardized, such as gas stations selling fuel, consumer choices are often based on location and price. Threat of Substitute Products Firms face competition not only from direct competitors but also from substitute products or services in other industries. The pressure from substitute products increases with declining relative prices and decreasing consumer switching costs. The threat can be mitigated through product differentiation along dimensions valued by customers. Examples of substitute products include sweeteners as substitutes for sugar, laser surgery as a substitute for glasses and contact lenses, and tablets as substitutes for laptops. Bargaining Power of Buyers The bargaining Power of Buyers influence industries by exerting pressure on price reductions, quality improvements, and additional services. Buyer power is strong when buyers purchase a large quantity of an industry's output, have the potential to integrate upstream, have multiple suppliers for standardized products, pay a low switching cost, consider the purchased product a significant part of their supply costs, or the product is easily substituted. An example is the bargaining power of drivers who can choose any gas station for fuel purchases. Bargaining Power of Suppliers Suppliers can impact industries by raising prices or reducing product/service quality. Supplier power is strong when the industry is dominated by a limited number of suppliers, products or services are unique with no substitutes, or suppliers can integrate downstream and compete with current buyers. Examples include the oil industry, where a limited number of suppliers dominate, and the electricity industry, where providers can integrate downstream and compete with current buyers. 2.2.2.2. EFE Matrix External Factor Evaluation The External Factor Evaluation (EFE) matrix method is a strategic management tool commonly utilized to visualize and prioritize the opportunities and threats confronting a business. The EFE matrix involves the following steps: ✓ List factors: Begin by compiling a list of major external factors and categorize them into two groups: opportunities and threats. ✓ Assign weights: Allocate a weight to each factor, with values ranging between 0 and 1 (where zero signifies insignificance and one denotes the utmost influence). The cumulative value of all weights should equal 1. ✓ Rate factors: Provide a rating for each factor on a scale of 1 to 4. The rating reflects how effectively the firm's current strategies address the factor. Ratings are interpreted as follows: 1 = poor response, 2 = below average response, 3 = above average response, and 4 = superior response. Weights are specific to the industry, while ratings are specific to the company. ✓ Multiply weights by ratings: Multiply the weight of each factor by its corresponding rating to calculate the weighted score for each factor. ✓ Total all weighted scores: Sum all the weighted scores for each factor to derive the total weighted score for the company.  Table 1. EFE MATRIX Example 1 = the response is poor; 2 = the response is below average; 3 = above average;4 = superior. 2.2.2.3. Strategic groups and strategic types Strategic Group Mapping is an analytical tool used for showing the different market or competitive positions that rival firms occupy in the industry. A strategic group consists of a set of firms emphasizing similar strategies with similar resources. In any industry, the division of firms into strategic groups is useful for a better understanding of the competitive environment. Each industry contains one or more than one strategic group/s depending upon the strategies and market positions of industry members. By examining industry dynamics, strategic group mapping enables firms to recognize both favorable and unfavorable positions within the market landscape. Moreover, it guides firms in determining which strategic groups to target for market entry, offering valuable insights into the nature and intensity of entry barriers that may be encountered along the way. Guidelines for Constructing Strategic Group Maps The strategic groups within an industry can be represented graphically in a two-axis system, using two variables. ✓ There should be no correlation between the variables selected as axes for the map. ✓ There should be a big difference between the variables selected. This will help to easily identify the rival’s position in the marketplace. ✓ The variables selected should be discrete variable (a variable that can only take on a certain number of values.). ✓ A relative size of each strategic group depends upon the combined sales of the firms in each strategic group. ✓ Different competitive variables should be used as axes for the map because there is not necessarily one best map. Steps in the Construction of Strategic Group Map ✓ Analyzing the overall industry and identifying those competitive characteristics that differentiate firms in the industry. ✓ Variables selected as axes for the map could be product-line size (wide, narrow), price (high, medium, low), quality (high, medium, low), geographic coverage (local, regional, national, global) etc. ✓ Using two-variable map, plot all the firms in the industry. For example price (high, medium, low) can be taken on x axis whereas product-line extent (wide, narrow) on y axis and all the firms can be plotted accordingly. ✓ All the firms that fall in the same strategy space should be allocated to the same strategic group. ✓ Finally, sketch circles around each strategic group. The size of the circles depends upon the share of a strategic group in the total industry sales revenue. Strategic Types Within analyzing the intensity of the competition in an industry or a strategic group it is useful to characterize the competitors. The concept of strategic type defines a category of companies that have a common strategic orientation and a combination of structure, culture and organizational processes in line with that strategy. Competitor companies in an industry can be divided, according to their strategic orientation, in the following types: ✓ Prospector companies have many product lines, focusing on product innovation and market opportunities. ✓ Defender companies have several product lines and focus on improving the effectiveness of existing activities, by implementing lower costs, without having a concern for innovation. ✓ Analyzers companies are operating on at least two different markets (one stable and one variable) with different products. In stable markets the emphasis is placed on efficiency and in variables markets on innovation. Example: IBM and Procter & Gamble having activities in several industries are analyzers.  ✓ The reactors are firms that do not have a proper relationship between strategy and organizational structure and culture. They make ineffective responses to environmental pressures. Example: Most airlines in the U.S. tend to be the reactors, being forced to respond to the actions of newer founded firms, like Southwest and JetBlue. Strategic group mapping plays an important role in business analysis by helping firms identify key competitors and understand their competitive strategies. Additionally, this method uncovers potential market opportunities and identifies strategic challenges that require attention. 2.3. The internal environment Internal environment analysis requires gathering and assimilating information about firm’s management, marketing, finance and accounting, production and operations, research and development and management information systems. The internal analysis is conducted in parallel with the analysis of the external environment. Representative managers and employees from throughout the firm need to be involved in determining a firm’s strengths and weaknesses. Advantages of performing an internal audit is an excellent occasion for improving the process of communication provides the opportunity for managers and employees to understand how their jobs, departments and divisions fit into whole organization enable the company to gain competitive advantage help the company to have a clear view over its future strategy. Resources and competencies The resources of a firm serve as inputs in the production or service process, and they can be categorized as tangible or intangible. Tangible resources are assets that are observable and quantifiable, representing the physical elements of the organization that enhance its value. Tangible resources include financial resources and physical resources such as equipment, facilities, raw materials, and the strategic location of plants and equipment. On the other hand, intangible resources lack a physical presence but provide substantial benefits to the organization, often challenging for competitors to analyze and imitate. Intangible resources encompass knowledge, trust, the firm's reputation for its goods and services, leadership skills, managerial expertise, organizational culture, and employee loyalty. The strategic value of resources is determined by their contribution to the development of competencies, core competencies, and competitive advantage. It is important to note that resources alone do not automatically generate value. To achieve a competitive advantage, a firm's resources must interact and combine to create competencies. Examples: 1. Taken separately, Ford Company’s resources (engineers, designers, IT resources) have a limited value. Together, they generate research and development competencies which are necessary to create new models of cars. 2. Amazon.com has combined the distribution and service resources to generate a competitive advantage. The firm started its activity as an online bookseller, directly shipping orders to customers. It quickly grew large and established a distribution network through which it could ship millions of different items to millions of different consumers. Compared to Amazon.com, the traditional booksellers like Toys 'R' Us and Borders found it hard to establish an effective online presence and they developed partnerships with Amazon.com. Competencies represent the firm's ability to leverage its resources for the execution of specific activities. These encompass processes and practices through which the collaboration of resources is orchestrated to deliver the desired goods or services. Competencies are cultivated within distinct functional areas, including design, marketing, manufacturing, management of information systems, research and development, as well as distribution and retail competencies. Numerous companies have the capability to manufacture computers, but the pivotal question revolves around whether they can produce computers with a cost, quality, and speed comparable to those crafted by Dell Computer. Achieving a competitive advantage necessitates firms discerning what they can excel in compared to their competitors. Core competencies are established through a unique amalgamation of resources that not only provide added value but also serve as a wellspring of competitive advantage, positioning a firm ahead of its rivals. The role of core competencies for a firm is multifaceted: they contribute to creating value for customers, enhance efficiency, and serve as a foundation for venturing into new markets. Core competencies meet four essential criteria: ✓ Valuable: These competencies empower the firm to seize opportunities or counter threats in its external environment. ✓ Rare: Core competencies are characterized by their scarcity, possessed by only a few competitors. ✓ Costly to Imitate: Competencies that are challenging for other firms to replicate. ✓ Non-Substitutable: Core competencies are irreplaceable, lacking strategic equivalents.  2.3.1. Value Chain Analysis Value chain analysis allows the firm to identify and to understand the parts of its operations that create value and those that do not create value. Each product (category of products) of firm has its own value chain. Fig. 2 Value Chain Activities Firm Infrastructure Human Resources Management Tehnological Development Profit Procurement Inbound Operations Outbound Marketing Service logistics logistics and sales Profit Value Chain activities are:  primary activities  support activities The value-creating potential of primary activities: ✓ Inbound Logistics: Encompassing materials handling, warehousing, and inventory control, this involves the processes utilized for the storage and distribution of inputs to a product. ✓ Operations: This pertains to the essential activities required to transform the inputs acquired through inbound logistics into the final product form. ✓ Outbound Logistics: This involves activities related to the collection, storage, and physical distribution of the final product to customers. ✓ Marketing and Sales: These activities are undertaken to facilitate the means by which customers can purchase products and to encourage them to do so. ✓ Service: Encompassing activities designed to enhance or maintain a product's value. ✓ Support activities play a crucial role by providing the necessary assistance for the primary activities to unfold effectively.  The value-creating potential of support activities: ✓ Procurement: Encompassing activities directed towards acquiring the necessary inputs for the production of a firm's products. ✓ Technological Development: Activities undertaken to enhance a firm's products and the processes employed in their manufacturing. ✓ Human Resources Management: Involves activities related to the recruitment, hiring, training, development, and compensation of all employees. ✓ Firm Infrastructure: Encompasses activities such as general management, planning, finance, accounting, and legal support. 2.3.2. Internal Factor Evaluation Matrix (IFE) The Internal Evaluation Matrix method serves as a strategic-management tool employed to assess and appraise major strengths and weaknesses within the functional areas of a business. ✓ List Factors: The initial step involves compiling a list of internal factors, which is then categorized into two groups: strengths and weaknesses. ✓ Assign Weights: Allocate a weight to each factor, with values ranging between 0 and 1 (where zero signifies insignificance, and one denotes the utmost influence). The cumulative value of all weights should equal 1. ✓ Rate Factors: Assign a rating to each factor on a scale of 1 to 4, indicating whether the factor represents a major weakness (rating 1), minor weakness (rating 2), minor strength (rating 3), or major strength (rating 4) ✓ Multiply Weights by Ratings: Determine the weighted score for each factor by multiplying its weight by its assigned rating. ✓ Sum the Weighted Scores: Calculate the total weighted score for the organization by summing the weighted scores of each variable. Scores well below 2.5 indicate organizations with internal weaknesses, while scores significantly above 2.5 suggest a strong internal position.  Table 2. IFE MATRIX Example IFE Matrix Example Weighted Key Internal Factors Weight Rating Score Strengths 1. Diversified income (5 different brands earning 0.1 4 0.4 more than $4 billion each) 2. Brand reputation valued at $35 billion 0.08 3 0.24 3. Strong patents portfolio (13,000 patents) 0.07 4 0.28 4. Excellent employee management 0.02 3 0.06 5. Competency in mergers and acquisitions 0.06 3 0.18 6. Extensive distribution channels 0.11 4 0.44 7. Strong product ecosystem 0.08 4 0.32 Weaknesses 8. High debt level ($3 billion) 0.1 1 0.1 9. Over-dependence on sales from UK 0.13 2 0.26 10. Too low net profit margin 0.07 2 0.14 11. Competition based on prices 0.09 2 0.18 12. Rigid (bureaucratic) organizational culture 0.04 1 0.04 impeding fast introduction of new products 13. Negative publicity 0.05 2 0.1 Total 1 - 2.74 The process of Benchmarking Benchmarking is an analytical tool by which a firm can determine whether activities on its value chain are competitive compared to its competitors. Through benchmarking, a firm identifies the best practices used by competitors in the industry and implements these practices to improve its own activities. Based on the results of benchmarking, managers take actions to improve strategic competitiveness by identifying those activities on the value chain, to which competitors have a competitive advantage through cost, service, reputation. Sources for benchmarking competitors' value chain activities and associated costs include reports from firms, trade publications, suppliers, distributors, consumers, business partners, creditors, and shareholders. In the USA, because of the benchmarking popularity, there are many consultancy firms that collect information, make benchmarking studies and distribute the results without disclosing their sources.  The advantages of benchmarking are: ✓ enables the best practices in the industry to be incorporated into your own business. ✓ can stimulate and motivate the firm’s personnel, whose creativity is absolutely necessary to implement these practices. ✓ can lead to the elimination of resistance to change inside the firm. ✓ firms will determine the costs that can be achieved by incorporating the practices used by other firms. ✓ the staff involved in the benchmarking process is expanding its professional knowledge because of contacts and interactions with other firms. The essential elements that ensure the success of benchmarking: ✓ aligning benchmarking with the organization's mission ✓ setting measurable objectives ✓ securing commitment from top management ✓ building a robust team ✓ directing team efforts towards the most pertinent issues ✓ thoughtfully selecting competitor firms whose practices merit study ✓ cultivating a culture of change within the organization By incorporating these essential elements, organizations can harness the power of benchmarking to drive continuous improvement and achieve sustainable success. 2.4. Strategy typologies 2.4.1. Business level strategies Strategies are formulated on different hierarchical levels within a firm: ✓ At the firm level is formulated the firm strategy which establish the fields of activities (businesses) and the markets on which the firm will compete ✓ At business level is formulated a strategy for each business which establishes how the firm will compete into that business ✓ At the functional level are developed functional strategies which refers to the formulation and implementation of business strategy by firm’s functions. Sources of competitive advantage may stem from either unique product differentiation or excelling as the industry's lowest-cost producer. Additionally, a company's competitive advantage may arise from its strategic decision to target either a broad market or a specific niche market.  Fig 3. Generic Strategies Cost leadership strategy The characteristics of cost leadership strategy are: ✓ firms offer standardized goods or services. ✓ firms produce goods or services with features that are acceptable to costumers at the lowest cost, relative to that of competitors. ✓ these firms are targeting customers with small and medium income. The firms that adopt cost leadership strategy can not completely ignore the possible sources of differentiation of products such as quality, design, a minimum level of after sales services. See the video: https://www.youtube.com/watch?v=qOEUQg7GWOs Example: AirAsia current is a market leader of LCC in Malaysia, Thailand, and Indonesia, that faces competition from both existing and new players. In order to sustain its competitive advantage, AirAsia makes efforts to create cost advantages across multiple value chains. AirAsia stresses to be the lowest cost carrier in the airline industry. As the demand for the lowest cost carrier is growing rapidly, this can be a great opportunity for AirAsia Company to run their business. Competitive Risks Associated with the Cost Leadership Strategy: ✓ One significant risk inherent in pursuing a cost leadership strategy is the potential obsolescence of the processes used for production and distribution. As competitors introduce innovative methods and technologies, there's a risk that  the cost leader's established processes may become outdated, impacting its competitive edge. ✓ Another risk lies in excessive focus on cost reduction, potentially neglecting the importance of understanding customer perceptions regarding differentiation. While cost leadership aims at offering products or services at the lowest prices, ignoring customer preferences for quality or unique features may lead to losing market share to competitors who better fulfill these needs. ✓ Furthermore, there's a risk of competitors successfully imitating the cost leader's strategy, eroding its competitive advantage. When competitors replicate the cost leader's approach and offer similar products or services at comparable prices, the cost leader must pivot to enhance the value proposition of its offerings. This could involve improving product quality, enhancing customer service, or introducing additional features to maintain customer loyalty and competitiveness in the market. Differentiation Strategy The characteristics of differentiation strategy are as following: ✓ Firms offers value to costumers by the unique characteristics of products or services ✓ By manufacturing differentiated products the firms satisfy specific needs of customers ✓ The prices of products are high ✓ The target consumers are those who have high and medium income If a firm is differentiated its products more than its competitors do, the more protection will gain in their actions of imitation. A product or service can be differentiated through better quality, unique characteristics, responsive customer service, rapid product innovations, design, and perceived prestige. Example: Nike Inc.’s international success builds on the company’s differentiation strategy similar to the competitors, such as Under Amour, Adidas, New Balance, Puma, and ASICS so on and so forth. Not only the sporting goods industry environment but also the automotive competing businesses such as Audi, BMW, Volkswagen also implement their own generic differentiation strategy. Competitive risks of the differentiation strategy include customers balking at the price gap between the differentiator and the cost leader and narrowed perceptions of a product's value due to competitor offerings. Additionally, imitation by rivals may diminish the perceived uniqueness of a differentiated product.  Focus Strategies Firms choose a focus strategy when they want their core competencies to serve the needs of a particular industry segment or niche at the exclusion of others. The focus strategy is an integrated set of actions designed to produce or deliver goods or services that serve the needs of a particular competitive segment, such as: ✓ a particular buyer group ✓ different segment of a product line (products for professional painters) ✓ different geographic markets Firms can generate value for customers in distinct market segments through the implementation of either the focused cost leadership strategy or the focused differentiation strategy. Firms use focused cost leadership strategy when they serve small customers groups which have specific needs and buy small amounts of products and the competitors can not satisfy their needs at the same low prices. Please see the video on Focused Strategy: https://www.youtube.com/watch?v=cSMD6MoNeBo Firms use the focused differentiation strategy when they serve a small customer group which have various needs that can be satisfied with differentiated products. Firms using this strategy can be successful when the amounts of products the customers need are small and the competitors are not interested in serving these customers. Integrated Cost Leadership/Differentiation Strategy Particularly in global markets, the firm`s ability to integrate the means of competition necessary to implement the cost leadership and differentiation strategies may be critical to developing competitive advantages. The company that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: ✓ adapt quickly to environmental changes ✓ learn new skills and technologies more quickly ✓ effectively leverage its core competencies while competing against its rivals Example: IKEA strives to keep costs as low as possible but also to provide quality, design- friendly products; the aim is to create a better everyday life for many people by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.  2.4.2. Corporate-level strategies Corporate-level strategy specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets. Corporate-level strategy entails crucial decisions that shape a company's expansion and direction. It involves determining the industries into which the company should venture, strategically choosing which markets to enter. Additionally, it involves the central office's pivotal role in steering the strategy across various business units, ensuring alignment with overarching organizational goals. Effectively managing the group of businesses falls under this strategy, ensuring coherence and synergy among diverse operations. 3.4.2.1. Diversification strategy The firms formulate a diversification strategy when they simultaneously run more businesses in different industries. Diversification strategies are becoming less popular as organizations are finding it more difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify so as not to be dependent on any single industry, but the 1980s saw a general reversal of that thinking. Diversification is now on the retreat, firms are selling or closing less profitable divisions in order to focus on core businesses. The greatest risk of being in a single industry is having all of the firm`s eggs in one basket. Although many firms are successful operating in a single industry, new technologies, new products or fast-shifting buyer preferences can decimate a particular business. Reasons for diversification: The motivations for diversification encompass enhancing the firm's value through improved overall performance and securing market power compared to competitors. Diversification should go beyond merely dispersing business risk across various industries, as shareholders could achieve this by investing in different firms across diverse sectors. It is meaningful only if the strategy contributes more to shareholder value than what shareholders could achieve individually. Some companies today take pride in being conglomerates, demonstrating that focus and diversity can coexist harmoniously. Benefits of diversification strategy Benefits internal to the group. ✓ Economies of scale/scope: cost savings developed by a group when it shares activities or transfer capabilities, core competencies, from one part of a group to another. Benefits external to the group ✓ Vertical integration might deliver cost savings through not having to pay distributors or by producing its own inputs. ✓ Market power results when a company has lower costs or a competitive position as a result of cooperation and/or by offering a wide range of products.  Financial Benefits ✓ Reduced capital expenses – the headquarters can leverage its enhanced negotiating influence on secure financing for individual companies that surpasses what they could obtain independently. ✓ Corporate restructuring – the headquarters holds the potential to facilitate and fund crucial restructuring initiatives that exceed the resources available to an individual company. ✓ Effective capital distribution – the headquarters is expected to allocate funding across the group due to its central perspective. The costs tied to corporate-level strategy span multiple dimensions. Firstly, there are the scale and expenditures related to headquarters personnel, covering functions such as general management, legal affairs, financial oversight, reporting, control, and tax compliance. Secondly, managing diversified firms entails complexities that can lead to cost escalation. These intricacies often manifest in bureaucratic reporting structures to the headquarters, potentially resulting in conflicts over the fair allocation of resources among business units. Furthermore, diversified firms may face challenges in maintaining a competitive resource- based focus across their various businesses, which could lead to a shortfall in competitive emphasis and impact overall performance. Related diversification Through the implementation of a related diversification strategy, the company leverages and extends its resources, capabilities, and core competencies to generate added value. The aim of employing this strategy is to foster the development and utilization of economies of scale/scope among its business units. Economies of scale entail reducing the cost per unit by expanding the production scale of a single product type. On the other hand, economies of scope involve reducing the average cost for a firm in producing two or more products. These cost savings result from the successful transfer of capabilities and competencies developed in one of the firm's businesses to another. Related diversification may be an effective strategy in the following situations: ✓ 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 related, products could be offered at highly competitive prices. ✓ When new, but related, products have seasonal sales levels that counterbalance an organization`s existing peaks and valleys. ✓ When an organization`s products are currently in the declining stage of the product`s life cycle. ✓ When an organization has a strong management team.  Integration Strategies The forms of related diversification strategy are: ✓ Backward integration ✓ Forward integration ✓ Horizontal integration Backward integration is a strategy of seeking ownership or increased control of a firm`s suppliers. This strategy can be especially appropriate when a firm`s current suppliers are unreliable, too costly or cannot meet the firm`s needs. Example: When a customer buys a box of diapers at Wal-Mart, a scanner at the store`s checkout counter instantly zaps an order to Procter & Gamble. This allows instant tracking and recording without invoices and paperwork. Backward integration can be an effective strategy in the following situations: ✓ When an organization`s present suppliers are expensive, or unreliable or incapable of meeting the firm`s needs ✓ When the number of suppliers is small and the number of competitors is large ✓ When an organization competes in an industry that is growing rapidly ✓ When an organization has both capital and human resources to manage the new business of supplying its own raw materials ✓ When the advantages of stable prices are particularly important Forward integration is a strategy of gaining ownership or increased control over distributors or retailers. Increasing numbers of manufacturers today are pursuing a forward integration strategy by establishing Web sites to directly sell products to customers. Dell Computer began pursuing forward integration by establishing its own stores- within-a-store in Sears, Roebuck. This strategy supplements Dell`s mall-based kiosks, which enable customers to see and try Dell computers before they purchase one. Neither the Dell kiosks nor the Dell stores stock computers. Customers still will order the computers exclusively by phone or over the Internet. An effective means of implementing forward integration is franchising. More than 2,000 companies in about 50 different industries in the USA use franchising to distribute their products or services. Businesses can expand rapidly by franchising because costs and opportunities are spread among many individuals (the franchisees). Forward integration can be an effective strategy in the following situations: ✓ When an organization`s present distributors are expensive, or unreliable or incapable of meeting the firm`s distribution needs. ✓ When an organization competes in an industry that is growing and is expected to continue to grow. ✓ When an organization has both the capital and human resources needed to manage the new business of distributing its own products.  ✓ When present distributors or retailers have high profit margins. Horizontal integration is a strategy of seeking ownership or increased control over a firm`s competitors. An important trend in strategic management today is the increased use of horizontal integration as a growth strategy, in the form of mergers, acquisitions and takeovers among competitors. Horizontal integration can be an effective strategy in the following situations: ✓ When an organization competes in a growing industry. ✓ When increased economies of scale provide major competitive advantages. ✓ When an organization has both the capital and human talent needed to successfully manage an expanded organization. Example: Transilvania Bank is the largest bank in Southeast Europe. As a universal bank, it covers all segments and business lines in the financial field. It has 20% market share, more than 4 million customers, approximately 10,000 employees, state-of-the-art online banking solutions and a strong nationwide network of agencies. The ambitious integration plan, established by TRANSILVANIA BANK with the acquisition of IDEA BANCK is based on the experience gained on a similar project, when Transilvania Bank successfully integrated Bancpost from Eurobank Group or Volksbank Romania. Moreover, in February 2024, BT acquired OTP Bank for 347,5 million euros. Horizontal integration would not be appropriate if competitors are doing poorly, because in that case overall industry sales are declining. The advantages of a related diversification strategy: ✓ Increased control over distributors or retailers. ✓ Knowledge, technical skills and technologies are shared across the group; ✓ Economies of scope; ✓ Reduced risks; ✓ Reduced costs. Unrelated diversification When using an unrelated diversification strategy firm do not seek either operations relatedness or corporate relatedness. An unrelated diversification strategy can create value through financial economies. Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm. Firms pursuing unrelated diversification try to acquire other firms whose assets are undervalued or firms that have high growth prospects but are short on investment capital. An obvious drawback of unrelated diversification is that the parent firm must have an excellent top management team that plans, organizes, motivates, delegates and controls effectively. It is much more difficult to manage businesses in many industries than in a single industry. Example: The Italian company Benetton recognized that diversification may be necessary to ensure continued growth in the event of the phenomenon of saturation in the existing markets, so it decided to enter new markets, making several acquisitions of companies and managing to expand its activity in the field of supermarkets, of formula 1 races, of restaurants located on highways, of the manufacture of sports articles. Unrelated diversification may be an effective strategy in the following situations: ✓ When revenues derived from a firm`s current products or services would increase significantly by adding the new, unrelated products. ✓ When a firm competes in a highly competitive or a no-growth industry, as indicated by low industry profit margins and returns. ✓ When a firm has the capital and managerial talent needed to compete successfully in a new industry. ✓ When existing markets for a firm`s present products are saturated. ✓ When a firm has the opportunity to purchase an unrelated business that is an attractive investment opportunity. Example: In the pandemic context, Jidvei Group, one of the largest local winemakers has bought in 2020 a small dairy factory in Alba County.  2.5.1. The Tools of Corporate-level strategies 2.5.1.1. Cooperative strategy A cooperative strategy entails firms collaborating to attain a common goal. Managers employ such strategies for multiple purposes: to deliver customer value surpassing costs, and to gain a competitive advantage. Joint ventures Joint venture is a popular strategy that occurs when two or more firms form a temporary partnership or consortium for the purpose of capitalizing on some opportunities. Joint ventures and cooperative arrangements among competitors demand a certain amount of trust if companies are to combat paranoia about whether one firm will injure the other. Often, the two or more firms form a separate organization and have shared equity ownership in the new entity. Joint ventures are increasingly utilized by firms due to their capacity to enhance communication and networking, facilitate the global expansion of operations, and enable the pursuit of opportunities that may be too complex, uneconomical, or risky for a single firm to undertake independently. A few common problems that cause joint ventures to fail are as follows: ✓ Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture. ✓ The venture may benefit the partnering firms but may not benefit customers who then complain about poorer service or criticize the firms in other ways ✓ The venture may not be supported equally by both partners. A joint venture may be an effective strategy in the following situations: ✓ When a domestic firm is forming a joint venture with a foreign firm. ✓ A joint venture can provide a domestic firm with the opportunity for obtaining local management in a foreign country, reducing risks such as expropriation and harassment by host country officials. ✓ When the distinct competencies of two or more firms complement each other especially well. ✓ When some project is potentially very profitable but requires overwhelming resources and risks. Example In 2003, BMW, a renowned car manufacturer, established a joint venture with Chinese automobile manufacturer Brilliance Auto Group. Named BMW Brilliance, the venture aimed to manufacture and distribute BMW vehicles in China. Both partners committed to investing €450 million in the venture, with BMW acquiring a 50% stake in the subsidiary, Brilliance Auto holding 40.5%, and the Shenyang municipal government owning the remaining 9.5%. ✓ When there exists a need to quickly introduce a new technology. Example: Microsoft and General Electric In 2012, technology giant Microsoft and world energy leader General Electric (GE) created a joint venture aimed at using data to improve healthcare quality and patient experience. The venture, named Caradigm, is probably one of the most famous examples of joint ventures you’ll find. Its premise was to bring together Microsoft’s strengths in creating large-scale data platforms with GE’s experience in developing healthcare applications, to form a child company that would be able to act more nimbly than either of the parent companies. It was formed as a 50/50 joint venture that started its life with 750 employees. However, four years later, Caradigm products were being used by more than 1,500 hospitals around the world. ✓ When two or more smaller firms have trouble competing with a large firm. When there exists a need to quickly introduce a new technology. Example: Even if you haven’t heard of the United Launch Alliance (ULA), the chances are you’ve heard of some of its work. It’s the company that launched the Curiosity rover – you know, the rover that landed on Mars in 2012 and discovered that the planet would once have been warm and wet?! Well, ULA is a joint venture that was formed in 2006 by two private aerospace companies, Lockheed Martin and Boeing. The now-partners used to compete to provide launch services to the US government. But when Elon Musk's SpaceX started undercutting their prices, the competitors decided to join forces in order to reduce costs. Since embarking on the 50/50 joint venture, the partners have successfully delivered more than 100 satellites into orbit And, perhaps even more importantly, they’re now SpaceX’s main competitor for government launches, with both having received contracts for national security and scientific missions.  Strategic alliances and networks A strategic alliance is a partnership of two or more firms to achieve strategically significant objectives that are mutually beneficial and may involve some partial ownership by the group. It is a cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage. Most strategic alliances are with a host country firm that has knowledge of the competitive conditions, legal and social norms that should help the firm manufacture and market a competitive product allow firms to share the risks and resources required to enter international markets. Strategic alliances are pursued for various reasons, including gaining entry to new markets, overcoming trade barriers, entering new business sectors, expediting the introduction of new products in existing markets, obtaining access to complementary resources, sharing risks, and collaborating on research and development expenses. Strategic alliances encounter numerous challenges and risks that can potentially hinder their success. Firstly, integrating distinct corporate cultures can prove to be challenging, as each partner may have its own set of values, norms, and practices. Secondly, partners may face issues related to compatibility or divergent goals, strategic orientations, or operational processes such as marketing and decision-making. These disparities can lead to conflicts and hinder effective collaboration. Moreover, in some cases, one partner's strategic intent may involve gaining specific knowledge about a technology or market with the aim of eventually becoming a competitor in the same market, posing a threat to the alliance's sustainability and trust between partners. Examples1: ✓ Spotify And Uber A prominent strategic alliance example is the partnership between Spotify and Uber. The strategic alliance between the two organizations allows Uber users to connect to Spotify and stream their favorite music while on a ride. Not only does this personalized experience provide Uber with a significant edge over its competitors but it also helps Spotify gain access to a wider customer base. Uber riders are encouraged to subscribe to Spotify Premium for a wider range of music. ✓ MasterCard And Apple Pay Apple’s collaboration with MasterCard is another strategic alliance example. Apple partnered with MasterCard while launching the Apple Pay system for contactless transactions. MasterCard customers could pair their card with an iPhone to make payments without having to use a physical card. Through this strategic alliance, MasterCard was able to up its brand presence by associating itself with a leading-edge 1 All these examples show how a strategic alliance has the potential to drive significant revenue and growth for the organizations involved, however, organizations must be careful while choosing a partner to ensure their partner brings in complementary skill sets and expertise to the table.  organization such as Apple. MasterCard’s expertise helped Apple refine Apple Pay by addressing bugs and resolving issues for customers promptly and efficiently. ✓ Chevrolet And Disney Chevrolet and Disney’s partnership to create Test Track at Walt Disney World’s EPCOT theme park is a popular strategic alliance example. Test Track is a theme park attraction that allows people to design their own personalized Chevrolet concept vehicle and then go for a ride that serves as a test drive of the vehicle they designed. Customers can not only step into the shoes of a Chevrolet designer but also experience the thrill of a theme park ride with hairpin turns, sudden drops and turbo launches. As a result of the strategic alliance, Disney can utilize Chevrolet’s expertise to offer their customers a unique and immersive ride while Chevrolet gains tremendous brand exposure. ✓ Vodafone India And ICICI Bank The partnership between Vodafone India and ICICI Bank is a prominent strategic alliance example. The two organizations joined forces to launch m-pesa, a mobile money transfer and payments service that helps customers access a wide range of offerings, including cash deposit and withdrawal, money transfer and mobile recharge. ICICI Bank gained access to Vodafone India’s extensive market reach. At the same time, Vodafone India utilized ICICI Bank’s technological innovation in banking to deliver a unique offering to its customers in the form of secure financial transactions. ✓ Barnes & Noble and Starbucks What’s a better combo than books and coffee? In 1993, Starbucks established a strategic alliance with American bookstore chain Barnes & Noble, opening Starbucks outlets within Barnes & Noble stores. People browsing for books at Barnes & Noble began to stop at Starbucks for a coffee break, while Starbucks drew in people wanting their daily dose of coffee into the bookstore. Both organizations benefited from a greater customer base and were able to expand their market reach significantly. The partnership also allowed Barnes & Noble to survive the test of time and keep operating as a brick-and- mortar bookstore even with the surge of digital formats. This is another significant strategic alliance example. The effectiveness of strategic alliances hinges on crucial elements, including: Choosing a compatible partner Selecting a partner with complementary resources and competencies Establishing trust between the partners Exercising caution to avoid divulging critical information that may compromise strategic competitiveness.  2.5.1.2. Merger and acquisitions A merger occurs when two firms of about equal size unit form one firm. The reason is that these firms have resources and competencies which can be integrated, and they will generate key competencies. An acquisition is a strategy through which a large firm acquires a smaller firm with the intent of making the acquired firm a subsidiary business within its portfolio. In business, a takeover is the purchase of one company (the target) by another the acquirer, or bidder. It refers to the purchase of a public company whose shares are listed on a stock exchange. A hostile takeover is an acquisition which is not desired by the partner. Example Gautam Adani is fast-rising in the world. In a span of a few years, he has claimed a spot as one of the richest people in the world. Along with the acquisition of NDTV, the Adani Group also acquired a majority stake in Ambuja Cements and its subsidiary, ACC Ltd. Adani is now the second largest cement manufacturer in the country after Aditya Birla Group’s UltraTech. In today's global marketplace, the landscape of competition is continually evolving, driving rivals to seek strategic alliances through mergers. These alliances are propelled by various forces, each contributing to the imperative of consolidation. Firstly, the pursuit of increased market power stands as a primary motivation, enabling companies to wield greater influence and command higher prices. Concurrently, reduced entry barriers incentivize mergers to fortify market positions and deter potential new entrants. Moreover, the diminished cost of new product developm