Strategic Management Essay

A strong understanding of what the external environment is needs to be established before starting an analysis of the problem at hand. The environment can be summarized as the conditions, entities, events and factors surrounding an organization that influences its activities and choices and determines its opportunities and risks (Business Dictionary). Generally, there are three levels at which it can be analysed, ranging from a more global perspective the macro-environment, to levels that are more specific to the company, industry and competitor markets. As a rule the rate of change for each level is respectively higher yet for some companies the environment is a more turbulent experience than for others. Van Der Heijden (1993) notes that strategic goals are planned through statements of ‘vision’ and ‘mission’, consequently knowledge of the external environment is required to demonstrate either one of these capacities. Managers need to evaluate their surroundings in order to develop a business strategy, make risk assessments, reposition, remain innovative and keep ahead of the competition. Competitive advantage is achieved through research, knowing what people might need that is not currently on offer. Seeing business from an “outside-in” perspective is the basis of any customer-centric firm. This is where an organization will actively search to provide products and services of value to the customers rather than focus uniquely on sales. Gulati (2010) of the Harvard Business School conducted a survey which proved in his opinion that firms that adopted an outside-in perspective to business were more successful in surviving turbulent times than those who opted for an inside-out perspective. However it is still argued that a company should first master its own resources before attempting to adapt to the market, thus adopting an inside-out approach. From a global perspective, success in foreign markets is measured by the organizations capability of creating a suitable strategy to fit the environment (Bradon-Fuller and Stopford, 1994; Markides, 1998). Understanding the environment can be a costly process. The personnel conducting analysis are not immediately contributing to profit whereas they would be if they were working in production or sales. When analysts are wrong, resources are wasted.

Organizations that do not plan on investing in a new market are still affected by change at multiple levels. Modern environmental factors that contribute to the uncertainty may not have the same importance to each business. Terrorism, war, disease, currency fluctuations and oil price instability would be regarded as important factors in the airline industry, whilst and technological innovation and interest rates would matter to a small IT company looking to expand. The majority of companies are now affected by industry turbulence such as: greater product multiplicity, shorter planning horizons, innovation, production cycles and new entrants. This said, McNamara, Vaaler and Devers (2003) claim in their research that dynamic change and hypercompetion are no stronger now than they were in the past, the evidence they use to support this theory is that there has been little shift in the stability pattens of business performance. They refer to the idea of ‘hindsight bias’ (Fischoff, 1975; Wood, 1978) to explain why individuals perceive present events as less logical and stable compared to the past. The problem with this theory is that business performance is determined by a multitude of other factors other than the external environment, even Porter only considers that 19% of a firm’s profitability is accounted for by the state of the industry whereas 31% is attributed by the firm itself and the remaining 50% by “other factors”. Hypercompetition can be viewed from two opposite points of view, while some may argue that competing globally has produced a larger number of competitors others may consider that this is a least proportional to the

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