Building business strategy for Vietcombank Hoan Kiem branch, period 2013-2017

GRIGGS UNIVERSITY
GLOBAL ADVANCED MASTER OF BUSINESS ADMINISTRATION PROGRAM



CAPSTONE PROJECT REPORT

BUILDING BUSINESS STRATEGY
FOR VIETCOMBANK HOAN KIEM
BRANCH, PERIOD 2013-2017


Group Number : 01, GaMBA.M0111
Student’s name:
Le Thi Thu Ha
Tran Vinh Hao
Nguyen Thi Thu Hien
Chu Viet Quang
Nguyen Ngoc Thu

HANOI 2012



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ACKNOWLEDGEMENTS

We would like to thank Griggs University, the representative of Grigg
University in Vietnam, ETC center of Hanoi National University, ETC staff who
are dedicated to support organizational work, facilities, and help us during the
learning process.
We would like to thank the teachers who taught and tutored in the program for
academic knowledge and practical experience, methods of assessment, problem
solving and complementing us with valuable management knowledge. Thank the
teachers for advising us during research time and capstone completing.
We would also like to thank Joint Stock Commercial Bank for Foreign Trade of
Vietnam-Hoan Kiem Branch (VCB Hoan Kiem) that has created the favorable
conditions in the course of working, researching and providing data; thank students
of class GaMBA.M0111, colleagues and families created favorable conditions to
promote, encourage and help us during the process of work, study, research to
achieve good results that are presented in this graduation capstone.

COMMITMENT

We, five members of group no.1, class GaMBA.M0111 hereby certify that:
This capstone project report is our whole group research work with our own
efforts. The published data of organizations and individuals are consulted and used
for the purpose to completing the capstone as prescribed. The results that are
presented in the project are honest and have not been published by anyone in any
other works.
We also commit that this capstone project report has not been submitted to any
other research and training program, duplicated or violated of any other document.

Hanoi, 18
th
November, 2012
Group no.01 of class GaMBA.M0111

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TABLE OF CONTENTS
ACKNOWLEDGEMENTS i
LIST OF TABLES iv
LIST OF FIGURES, CHART v
LIST OF ABBREVIATIONS vi
INTRODUCTION 1
CHAPTER 1: THEORETICAL BASIS OF STRATEGIC MANAGEMENT 4
1.1 Business Strategy 4
1.1.1 The Concepts of Strategy 4
1.1.2 The characteristics and roles of strategy 5
1.2 Comprehensive Strategic-Management Model: 6
1.2.1 Strategy formulation: 7
1.2.2 Strategy implementation: 8
1.2.3 Strategy evaluation: 9
1.3 Strategic Formulation Process: 10
1.3.1 Input stage: 11
1.3.1.1 Analysis and evaluation of the external environment: 11
1.3.1.2 Analysis and evaluation of the internal environment: 16
1.3.2 Matching stage: 17
1.3.3 Decision stage: 20
1.3.3.1 Quantitative Strategic Planning Matrix (QSPM) 21
1.3.3.2 Strategic decision 22
CHAPTER 2: ANALYSIS OF BUSINESS ENVIRONMENT FOR 23
VIETCOMBANK HOAN KIEM BRANCH 23

2.1Overview of VCB Hoan Kiem branch 23
2.1.1 Overview of Vietcombank: 23
2.1.2. Current operation of VCB Hoan Kiem 25
2.1.2.1. Introduction: 25
2.1.2.2 Organizational model: 26
2.1.2.3 Main business areas: 26
2.2 Analysis of business environment. 28
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2.2.1 Analysis and evaluation of the external environment factors of VCB Hoan Kiem: 28
2.2.1.1 Analysis of the macro environment: 28
2.2.1.2 Analysis of the industry environment (Competitive analysis) 35
2.2.1.3 EFE matrix of VCB Hoan Kiem: 49
2.2.2 Analysis of the internal environment factors of VCB Hoan Kiem 52
2.2.2.1 Summary of the operations and business results from 2009-2012 52
2.2.2.2 Analysis of VCB Hoan Kiem resources 57
2.2.2.3 IFE matrix of VCB Hoan Kiem: 73
CHAPTER 3: BUSINESS STRATEGY FOR VIETCOMBANK 77
HOAN KIEM BRANCH, PERIOD 2013-2017 77
3.1 Targets for development of VCB Hoan Kiem 77
3.1.1 General targets of Vietcombank: 77
3.1.2 Specific objectives of VCB Hoan Kiem, period 2013 - 2017: 77
3.2 Strategic selection 79
3.2.1 SWOT matrix: 79
3.2.2 Strategic selection based on QSPM matrix: 84
3.3 Solutions of the strategic implementation: 89
3.3.1 Human resources solution 89
3.3.2 Organizational solutions 91

3.3.3 Risk management 91
3.3.4 R&D solution 92
3.3.5 Marketing solution: 94
3.3.6 Financial solution 96
3.3.7 Management Information System Solution 97
3.3.8 Technology and process solution: 97
3.4. Implementation roadmap and budget estimate for implementation of the business strategy:98
3.5 Recommendations to Vietcombank Head office: 100
CONCLUSION 102
REFERRENCES 104



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LIST OF TABLES
Table 1.1 External Factor Evaluation (EFE) Matrix 16
Table 1.2 Competitive Profile Matrix (CPM) 16
Table 1.3. Internal Factor Evaluation (IFE) Matrix 17
Table 1.4. The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix 20
Table 1.5 The Quantitative Strategic Planning Matrix—QSPM 22
Table 2.1 Classification of clients 36
Table 2.2 Basic operation data of the rivals 42
Table 2.3 CPM Matrix of the main competitors of VCB Hoan Kiem 43
Table 2.4 External factor evaluation Matrix of VCB Hoan Kiem (EFE Matrix) 49
Table 2.5 Bonus and welfare funds and the number of trained staffs 61
Table 2.6 Fund mobilization and loans, period 2010-2012 64
Table 2.7 Business result report of VCB Hoan Kiem 66

Table 2.8 IFE matrix of VCB Hoan Kiem 73
Table 3.1 SWOT matrix analysis 80
Table 3.2 QSPM Matrix 84
Table 3.3 Roadmap and estimated funding 99




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LIST OF FIGURES, CHART

Figure 1.1 - Comprehensive Strategic-Management Model 7
Figure 1.2 Strategic Formulation Process 10
Figure 1.3 Porter’s Five – Forces Model of Competition 13
Figure 2.1 Organizational chart 27
Chart 2.2 CPI changes in Vietnam, period 2009-2012 31
Chart 2.3 GDP growth rate of Ha Noi and Viet Nam during 2008-2012 32
Chart 2.4 Population of Ha Noi period 2008-2012 33
Chart 2.5 Comparison chart of lending and deposit scale 43
Figure 2.6 summarize the affect of competitive forces on VCB Hoan Kiem according to Porter’s
five forces model. 46
Figure 2.6 Assessment of industry environmental impacts in operation of VCB Hoan Kiem 46
Chart 2.7. Fund mobilization growth chart, period 2009-2012 53
Chart 2.8: Diagram of growth of outstanding loans by maturity. 54
Chart 2.9: Diagram of import-export payment volume from 2009-2012 55
Chart 2.10: Diagram of growth of customers using SMS Banking and Internet Banking of VCB
Hoan Kiem 55

Chart 2.11: Diagram of the number of cards issued by VCB Hoan Kiem from 2009-2012 55
Chart 2.12 Profit of VCB Hoan Kiem over the years of 2009-2012 56
Chart 2.13: Graph of the number of staffs of Hoan Kiem VCB 2009-2012 58
Chart 2.14 VCB Hoan Kiem staff's education level structure in 2012 58








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LIST OF ABBREVIATIONS

―+/-‖
:
Differences of value between two period, getting by take the
latter value minus the former ones. Incase of percentage
differences, divided the result to the former value.
ACB
:
Asia Commercial Bank
Agribank:
:
Agricultural and rural development Bank of Viet Nam
ANZ

:
Australian and New Zealand Bank.
Bad debt
:
Debt which is determined on level 3 to level 5 as per
classification on decision 493/2005/QD-NHNN dated 22,
April, 2005 of SBV.
BIDV
:
JSC Bank for investment and development of Viet Nam
BOD
:
Board of Director
CPM
:
Competitive profile matrix
DEPT.
:
Department
EFE
:
External factor evaluation
H.O
:
Head office
HSBC
:
The Hong Kong and Shanghai Banking Corporation
IFE
:

Internal factor evaluation
QSPM
:
The Quantitative strategic planning matrix
SBV
:
State Bank of Viet Nam
Service
:
Banking service
SMEs
:
Small and medium enterprises
SWOT
:
Strengths, weaknesses, opportunities and threats
VCB
:
JSC Bank for foreign trade of Viet Nam-Vietcombank
VCB Hoan Kiem
:
Vietcombank Hoan Kiem branch
Vietinbank
:
Industrial and Commercial JSC Bank of Viet Nam
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INTRODUCTION

1. The necessity to research the topic:
As a bank with a development history of nearly 50 years, Vietcombank is very
focused on strategic management and strategic direction of the phases which are
relatively appropriate with the development of the economy and the level of the
financial banking industry. The strategic planning has created Vietcombank with the
leading position in the domestic commercial banks as well as the prestige in the
international transactions. As a subsidiary branch, based on the orientation of the
development of the system as well as the annual business plan targets assigned,
VCB Hoan Kiem has built business plan for it in order to perform its good business
tasks. However, building its own business strategy for the next phase is necessary
for VCB Hoan Kiem because:
- The short-term nature of the year plans will affect the regulation and
allocation of resources, personnel arrangement, organizational arrangement as well
as policies for its clients, affecting the sustainability of development so initiative to
build business strategies is essential for VCB Hoan Kiem to stronger grow in the
coming period.
- In the research process of activity environment will help VCB Hoan Kiem
aware of the opportunities, threats as well determine the leading position of VCB
and VCB Hoan Kiem in a competitive environment, thereby making the appropriate
decisions in order to maximize opportunities and reduce the most threats from the
external environment and simultaneously initiative to lead the market to obtain
better business performance. During this period, the impact of monetary policy,
interest rates, exchange rates and the hot cold element of the stock market, real
estate market, gold market, due to the imperfections of the market economy has
made the business situation of the enterprises in general and the field of banking
and finance in particular have potential of risk factors. Increased competing
pressure is due to the massive establishment of banks, issuing for various branches
that do not rely on the synthesis of scale and the benefits of the economy, together
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with the pressure of the capital increase of the banks and liquidity problems. The
unfair competitive banks to ensure liquidity, bad debt resolution, non-transparent
financial information of enterprises have reflected dishonest financial situation,
causing confusion for customers, bad impact on the sustainability of the system is
the most basic difficulties that VCB Hoan Kiem must face.
Strategic management is a process, in which, building objectives, vision and
environmental analysis for the strategy formulation is the first steps. In a
competitive environment with a lot of impact factors, how a commercial bank
branch should orient and develop is not a simply matter for managers.
VCB Hoan Kiem is just in the stage of formation and development. The
achievements of the past four years have demonstrated the great efforts in its
operations, strategic direction and right plan. Besides, the success that VCB Hoan
Kiem has had also reveals huge potential about market and internal resources which
need to have a strategy to achieve better results in the next stage. Those are reasons
why our group chooses the topic: "Building Business strategy for Commercial
Joint Stock Bank for Foreign Trade of Vietnam, Hoan Kiem Branch, period
2013-2017".
2. Purpose, scope and methods of research:
The purpose of this project is to explore, analyze the Strengths, Weaknesses of
Hoan Kiem VCB, analyze and identify Opportunities and Threats in the coming
years from which to build the optimal strategies to achieve the set objectives. The
research range of the topic is only limited in the business activities of Hoan Kiem
VCB and the competitors in the region.
Our analysis are written based on the actual data of VCB system and VCB
Hoan Kiem with the data of the competitors in the region as well as the macro data
that we’ve collected. We use scientific methods and tools learned in the MBA
program to analyze such data, as a basis for the construction and selection of
business strategy.

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We hope that our business strategy that we’ve built based on the knowledge
and scientific methods which have been studied in this course will be able to apply
and be highly successful in the practice.
3. Outline of the capstone project report: consists of three chapters:
- Chapter 1: The theoretical basic of strategic management:
In the contents of this Chapter we refer to the theory and basic knowledge of
Strategic Management and the tools that we use in the analysis in the following
chapters. The purpose of this chapter is also to help us systematize the knowledge
learned to help us write better.
- Chapter 2: Analysis of business environment for VCB Hoan Kiem branch.
In this section we introduce the Parent Company - Vietcombank and
Vietcombank Hoan Kiem branch (Vietcombank Hoan Kiem) and analysis the actual
situation of Vietcombank Hoan Kiem. In this chapter, we also analyze the key
external and internal factors of Vietcombank Hoan Kiem in order to make base for
strategic formulation and decision in the following sections.
- Chapter 3: Business strategy for Vietcombank Hoan Kiem branch, period
2013-2017
In this chapter we use the science tools of strategic management subject to
analyze and match the input we get in Chapter 2 to formulate the feasible alternative
strategies and evaluate to decide the most suitable strategy for Vietcombank Hoan
Kiem, period 2013-2017.

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CHAPTER 1: THEORETICAL BASIS OF STRATEGIC MANAGEMENT
1.1 Business Strategy
1.1.1 The Concepts of Strategy
There is a famous quote of Joel Ross and Michael Kami on the strategy:
―Without strategy, an organization is like a ship without a rudder, going
around in circles. It’s like a tramp; it has no place to go.‖ – Joel Ross and Michael
Kami.
So what strategy is, why would an organization need a strategy?
Strategic concept originally used in the military, refers to the ways in which
a party done to change the position to take the victory in a military battle. Today,
the strategic concept is used more and more in the economic market when the
economy associated with the fierce competition makes businesses must find a way
(find strategy) to get the competitive advantage to compete with rivals.
There are many definitions about Strategy and Strategic Management:
Provisional definition: ―A coordinated series of actions which involve the
deployment of resources to which one has access for the achievement of a given
purpose‖.
―Strategic management is all about gaining and maintaining competitive
advantage‖.
According to Fred R. David, ―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‖ [Fred R.David
(Fourteenth edition-2011), Strategic Management concepts and cases, Pearson,
page 35]. As this definition implies, strategic management focuses on integrating
management, marketing, finance/accounting, production/operations, research and
development, and information systems to achieve organizational success.

The term strategic planning originated in the 1950s and was very popular
between the mid-1960s and the mid-1970s. During these years, strategic planning
was widely believed to be the answer for all problems. At the time, much of
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American corporate was ―obsessed‖ with strategic planning. Following that
―boom,‖ however, strategic planning was cast aside during the 1980s as various
planning models did not yield higher returns. The 1990s, however, brought the
revival of strategic planning, and the process is widely practiced today in the
business world.
There are two terms usually use together are strategic management and
strategic planning. The term strategic management in this text is used
synonymously with the term strategic planning. Sometimes the term strategic
management is used to refer to strategy formulation, implementation, and
evaluation, with strategic planning referring only to strategy formulation. The
purpose of strategic management is to exploit and create new and different
opportunities for tomorrow; long-range planning, in contrast, tries to optimize for
tomorrow the trends of today.
1.1.2 The characteristics and roles of strategy
Characteristics of strategy are all commitments, decisions and actions that an
organization needs to achieve: (1) strategic competitiveness; (2) sustainable
competitive advantage and (3) profit above average level.
The role of strategy is to use the resources effectively, enhance the
company's position and is the base to select the business alternatives.
Strategic management allows an organization to be more proactive than
reactive in shaping its own future; it allows an organization to initiate and influence
(rather than just respond to) activities—and thus to exert control over its own
destiny.

1.1.3 The categories of strategies:
Strategy is divided to 3 levels: Corporate Strategy, Business Strategy and
Functional Strategy (advertised Strategy, Sale Strategy…).
Corporate Strategy: are the specific actions that a company do to get a
competitive advantage by selecting and managing a group of different business
activities and competition in some sectors and certain products market.
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Business strategy: a series of commitments and actions that a company uses
to get a competitive advantage by exploiting core competencies on the certain
markets. The purpose of business strategy is to be formulated to create the
difference between the position of the company in relation to its competitors.
Strategy of functions: those related to the implementation of the strategy of
the business functions such as sales strategy, marketing strategy
1.2 Comprehensive Strategic-Management Model:
The strategic-management process consists of three stages: strategy
formulation, strategy implementation, and strategy evaluation.
The framework (see Figure 1.1) is a comprehensive model of the strategic-
management process. This model does not guarantee success, but it does represent
a clear and practical approach for formulating, implementing, and evaluating
strategies. In order to develop a strategy, we need answer three important
questions:
Where are we now?
Where do we want to go?
How are we going to get there?
Strategy formulation, implementation, and evaluation activities occur at
three hierarchical levels in a large organization: corporate, divisional or strategic
business unit, and functional. By fostering communication and interaction among

managers and employees across hierarchical levels, strategic management helps a
firm function as a competitive team. Most small businesses and some large
businesses do not have divisions or strategic business units; they have only the
corporate and functional levels. Nevertheless, managers and employees at these
two levels should be actively involved in strategic-management activities.




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Figure 1.1 - Comprehensive Strategic-Management Model

Business Ethics
, S
ocial Responsibilit
y
,
and En
vironmental Sustainabilit
y


Pe
r
f
o
r

m
Ex
t
e
rnal A
udit


Perform
Internal Audit

Dev
elop
V
ision
and
M
ission
Statements


Establish Long-
Term
Objectives


Generate,
Evaluate, and
Select
Strategies

Implement
Strategies—
Management
Issues
Implement
Strategies
Marketing,
Finance,
Accounting,
R&D, and
MIS Issues

Measure and
Evaluate
Performance
Global / International Issues



[Source: Fred R. David,―How Companies Define Their Mission,‖ Long Range Planning 22, no. 3
(June 1988): 40]
Strategic management process is dynamic and continuous so the strategic
formulation, implementation, and evaluation activities should be performed on a
continual basis, not just at the end of the year or semiannually.
1.2.1 Strategy formulation:
Strategy formulation includes developing a vision and mission, identifying
an organization’s external opportunities and threats, determining internal strengths
and weaknesses, establishing long-term objectives, generating alternative strategies,
and choosing particular strategies to pursue. Strategy-formulation issues include

deciding what new businesses to enter, what businesses to abandon, how to allocate
resources, whether to expand operations or diversify, whether to enter international
markets, whether to merge or form a joint venture, and how to avoid a hostile
takeover.
Because no organization has unlimited resources, strategists must decide
which alternative strategies will benefit the firm most. Strategy-formulation
decisions commit an organization to specific products, markets, resources, and
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technologies over an extended period of time. Strategies determine long-term
competitive advantages. For better or worse, strategic decisions have major
multifunctional consequences and enduring effects on an organization. Top
managers have the best perspective to understand fully the ramifications of strategy-
formulation decisions; they have the authority to commit the resources necessary for
implementation.
1.2.2 Strategy implementation:
Strategy implementation requires a firm to establish annual objectives,
devise policies, motivate employees, and allocate resources so that formulated
strategies can be executed. Strategy implementation includes developing a strategy-
supportive culture, creating an effective organizational structure, redirecting
marketing efforts, preparing budgets, developing and utilizing information systems,
and linking employee compensation to organizational performance.
Strategy implementation often is called the ―action stage‖ of strategic
management. Implementing strategy means mobilizing employees and managers to
put formulated strategies into action. Often considered to be the most difficult stage
in strategic management, strategy implementation requires personal discipline,
commitment, and sacrifice. Successful strategy implementation hinges upon
managers’ ability to motivate employees, which is more an art than a science.

Strategies formulated but not implemented serve no useful purpose.
Interpersonal skills are especially critical for successful strategy
implementation. Strategy-implementation activities affect all employees and
managers in an organization. Every division and department must decide on
answers to questions, such as ―What must we do to implement our part of the
organization’s strategy?‖ and ―How best can we get the job done?‖ The challenge of
implementation is to stimulate managers and employees throughout an organization
to work with pride and enthusiasm toward achieving stated objectives.
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1.2.3 Strategy evaluation:
Strategy evaluation is the final stage in strategic management. Managers
desperately need to know when particular strategies are not working well; strategy
evaluation is the primary means for obtaining this information. All strategies are
subject to future modification because external and internal factors are constantly
changing. Three fundamental strategy-evaluation activities are (1) reviewing
external and internal factors that are the bases for current strategies,(2) measuring
performance, and (3) taking corrective actions. Strategy evaluation is needed
because success today is no guarantee of success tomorrow! Success always creates
new and different problems; complacent organizations experience demise.
Many organizations semiannually conduct formal meetings to discuss and
update the firm’s vision/mission, opportunities/threats, strengths/weaknesses,
strategies, objectives, policies, and performance.
Strategy evaluation is necessary for all sizes and kinds of organizations.
Strategy evaluation should initiate managerial questioning of expectations and
assumptions, should trigger a review of objectives and values, and should stimulate
creativity in generating alternatives and formulating criteria of evaluation. Strategy-
evaluation activities should be performed on a continuing basis, rather than at the

end of specified periods of time or just after problems occur. Waiting until the end
of the year, for example, could result in a firm closing the barn door after the horses
have already escaped.
The final strategy-evaluation activity, taking corrective actions, requires
making changes to competitively reposition a firm for the future. Taking corrective
actions does not necessarily mean that existing strategies will be abandoned or even
that new strategies must be formulated. Taking corrective actions is necessary to
keep an organization on track toward achieving stated objectives.
Strategy evaluation can lead to strategy-formulation changes, strategy-
implementation changes, both formulation and implementation changes, or no
changes at all. Corrective actions should place an organization in a better position to
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capitalize upon internal strengths; to take advantage of key external opportunities;
to avoid, reduce, or mitigate external threats; and to improve internal weaknesses.
Continuous strategy evaluation provides information needed for an effective
strategic-management system.
1.3 Strategic Formulation Process:
Strategic formulation process includes three stages (see Figure 1.2)
Figure 1.2 Strategic Formulation Process
STAGE 1: THE INPUT STAGE
External Factor
Competitive Profile
Internal Factor
Evaluation (EFE)
Matrix (CPM)
Evaluation (IFE)
Matrix

Matrix

STAGE 2: THE MATCHING STAGE

Strengths-
Weaknesses-
Opportunities-
Threats (SWOT)
Matrix
Strategic
Position and
Boston
Consulting
Group
(BCG)
Matrix
Internal-
External
Grand
Strategy
Action
Evaluation
(IE) Matrix
Matrix

(SPACE) Matrix

STAGE 3: THE DECISION STAGE

Quantitative Strategic Planning Matrix (QSPM)

[Source: Fred R.David (Fourteenth edition-2011), Strategic Management concepts and cases,
Pearson].
Stage 1 of the formulation framework consists of the EFE Matrix, the IFE
Matrix, and the Competitive Profile Matrix (CPM). Called the Input Stage, Stage 1
summarizes the basic input information needed to formulate strategies. Stage 2,
called the Matching Stage, focuses upon generating feasible alternative strategies by
aligning key external and internal factors. Stage 2 techniques include the Strengths-
Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and
Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix,
the Internal-External (IE) Matrix, and the Grand Strategy Matrix. Stage 3, called the
Decision Stage, involves a single technique, the Quantitative Strategic Planning
Matrix (QSPM). A QSPM uses input information from Stage 1 to objectively
evaluate feasible alternative strategies identified in Stage 2. A QSPM reveals the
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relative attractiveness of alternative strategies and thus provides objective basis for
selecting specific strategies.
1.3.1 Input stage:
1.3.1.1 Analysis and evaluation of the external environment:
Analysis of the external environment is the analysis of five factors including
the four macro factors - the Political, Economic, Social and Technology (PEST) and
the 5th factor is analysis of industry environment.
The socio-economic factors and industry factors have a close relationship
and influence each other, thus creating opportunities and challenges for businesses.

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. Once
information is gathered, it should be assimilated and evaluated. A meeting or series
of meetings of managers is needed to collectively identify the most important
opportunities and threats facing the firm.
Political Factors (P)
Political, governmental, and legal factors, therefore, can represent key
opportunities or threats for both small and large organizations.
Variables change in the political environment affecting the business
including: government regulations, changes in tax laws, the special charges, the
level of government subsidies, antitrust law are main variables directly affect the
business environment. When the government changes a policy may be a challenge
for this business but be a opportunities for other business.
For industries and firms that depend heavily on government contracts or
subsidies, political forecasts can be the most important part of an external audit.
Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can
affect firms significantly. The increasing global interdependence among economies,
markets, governments, and organizations makes it imperative that firms consider the
possible impact of political variables on the formulation and implementation of
competitive strategies.
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Economic factors (E)
Economic (E) factors have a direct impact on the potential attractiveness of
various strategies. For example, when interest rates rise, funds needed for capital
expansion become more costly or unavailable. Also, when interest rates rise,
discretionary income declines, and the demand for increases. Also, when the market

rises, consumer and business wealth expands. Economic factors include stock
prices, interest rates, inflation rates, money market rates, Federal government
budget deficits, unemployment trends…
Social factors (S)
Social, cultural, demographic, and environmental changes have a major
impact on virtually all products, services, markets, and customers. Small, large, for-
profit, and nonprofit organizations in all industries are being staggered and
challenged by the opportunities and threats arising from changes in social, cultural,
demographic, and environmental variables.
Technology factors (T)
Technological factors represent major opportunities and threats that must be
considered in formulating strategies especially in internet and information
technology today. Technological advancements can dramatically affect
organizations’ products, services, markets, suppliers, distributors, competitors,
customers, manufacturing processes, marketing practices, and competitive position.
Technological advancements can create new markets, result in a proliferation of
new and improved products, change the relative competitive cost positions in an
industry, and render existing products and services obsolete. Technological changes
can reduce or eliminate cost barriers between businesses, create shorter production
runs, create shortages in technical skills, and result in changing values and
expectations of employees, managers, and customers. Technological advancements
can create new competitive advantages that are more powerful than existing
advantages. No company or industry today is insulated against emerging
technological developments. In high-tech industries, identification and evaluation of
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key technological opportunities and threats can be the most important part of the
external strategic-management audit.

Industrial analysis
Industry environment analysis is the analysis of the competitive forces in the
industry. An important part of the external environment analysis is to identify the
competitors and identify strengths, weaknesses, capabilities, opportunities, threats,
and their strategic goals. Collecting and evaluating information on competitors is
essential for successful strategy formulation. Five competitive forces model of
Michael Porter (see Figure 1.3) is commonly approach used to analyze the industry
environment.
Five competitive forces in Porter's model include:
1. Rivalry among competing firms
2. Threat of new entrance
3. Threat of substitute products
4. Bargaining power of suppliers
5. Bargaining power of customers
Figure 1.3 Porter’s Five – Forces Model of Competition








[Source: Fred R.David (Fourteenth edition-2011), Strategic Management concepts and cases,
Pearson].
Rivalry Among Competing Firms
Rivalry among competing firms is usually the most powerful of the five
competitive forces. The strategies pursued by one firm can be successful only to the
Threat
of

new entrance

Rivalry among competing firms

Threat
of
substitut
e pr
oducts


Bargaining power of suppliers
Bargaining power of customers

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extent that they provide competitive advantage over the strategies pursued by rival
firms. Changes in strategy by one firm may be met with retaliatory countermoves,
such as lowering prices, enhancing quality, adding features, providing services,
extending warranties, and increasing advertising.
The intensity of rivalry among competing firms tends to increase as the
number of competitors increases, as competitors become more equal in size and
capability, as demand for the industry’s products declines. Rivalry also increases
when consumers can switch brands easily; when barriers to leaving the market are
high; when fixed costs are high; when the product is perishable; when consumer
demand is growing slowly or declines such that rivals have excess capacity and/or
inventory; when the products being sold are commodities (not easily differentiated
such as gasoline); when rival firms are diverse in strategies, origins, and culture;

and when mergers and acquisitions are common in the industry. As rivalry among
competing firms intensifies, industry profits decline, in some cases industry
becomes inherently unattractive.
Potential Entry of New Competitors
Whenever new firms can easily enter a particular industry, the intensity of
competitiveness among firms increases. Barriers to entry can include the need to
gain economies of scale quickly, the need to gain technology and specialized know-
how, the lack of experience, strong customer loyalty, strong brand preferences,
large capital requirements, lack of adequate distribution channels, government
regulatory policies, tariffs, lack of access to raw materials, possession of patents,
undesirable locations, counterattack by entrenched firms, and potential saturation of
the market.
Despite numerous barriers to entry, new firms sometimes enter industries
with higher-quality products, lower prices, and substantial marketing resources.
When the threat of new firms entering the market is strong, incumbent firms
generally fortify their positions and take actions to deter new entrants, such as
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lowering prices, extending warranties, adding features, or offering financing
specials.
Threat of substitute products
In many industries, firms are in close competition with producers of
substitute products in other industries. Competitive pressures arising from substitute
products increase as the relative price of substitute products declines and as
consumers’ switching costs decrease.
Bargaining power of suppliers
The bargaining power of suppliers affects the intensity of competition in an
industry, especially when there is a large number of suppliers, when there are only a

few good substitute raw materials, or when the cost of switching raw materials is
especially high. However, in many industries it is more economical to use outside
suppliers of component parts than to self-manufacture the items.
Bargaining power of customers
When customers are concentrated or large or buy in volume, their bargaining
power represents a major force affecting the intensity of competition in an industry.
Rival firms may offer extended warranties or special services to gain customer
loyalty whenever the bargaining power of consumers is substantial. Bargaining
power of consumers also is higher when the products being purchased are standard
or undifferentiated. When this is the case, consumers often can negotiate selling
price, warranty coverage, and accessory packages to a greater extent. The
bargaining power of consumers can be the most important force affecting
competitive advantage.
EFE Matrix and CPM Matrix
Build the EFE and CPM matrix from the information collected is the way
that strategists usually used to summarized and evaluate the macroeconomic factors
(economic, social, cultural, demographic, environment, politics, technology, etc.)
and environment sectors, which identified opportunities and threats. Table 1.1 and
1.2 Illustrate how to build EFE and CPM.
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Table 1.1 External Factor Evaluation (EFE) Matrix
Key External Factors
Weight
Rating
Weighted Score
Opportunities
1. ….

2. …

…
…

2
3

…
…
Threats
1. ….
2. …

…
…

4
1

…
…
Total
1.00
…
…
[Source: Fred R.David (Fourteenth edition-2011), Strategic Management concepts and cases,
Pearson].

Table 1.2 Competitive Profile Matrix (CPM)

Critical Success
Factors
Weight
Company 1
Company 1
Company 1
Rating
Score
Rating
Score
Rating
Score
………
………
……
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…

…
…
…

…
…
…

Total
1.00
…
…
…
…
…
…
[Source: Fred R.David (Fourteenth edition-2011), Strategic Management concepts and cases,
Pearson].

1.3.1.2 Analysis and evaluation of the internal environment:
Analysis and evaluation of the internal environment means studying,
analyzing the internal information of the business, and then can identify the
resources, core competencies, identify the strengths and weaknesses of the business.
The process of performing an internal audit closely parallels the process of
performing an external audit. The internal audit requires gathering and assimilating
information about the firm’s management, marketing, finance/accounting,
production/operations, research and development (R&D), and management
information systems operations.
The Internal Factor Evaluation (IFE) Matri
x

A summary step in conducting an internal strategic-management audit is to
construct an Internal Factor Evaluation (IFE) Matrix. This strategy-formulation
tool summarizes and evaluates the major strengths and weaknesses in the functional
areas of a business, and it also provides a basis for identifying and evaluating
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relationships among those areas. The IFE Matrix provides important information for
strategy formulation.
Table 1.3 illustrates how to build an IFE matrix. Based on the summary
results obtained from the IFE matrix, strategist can identify the strengths and
weaknesses of the business, which can build or maintain the competitive advantage
of the business.
Table 1.3. Internal Factor Evaluation (IFE) Matrix
Key Internal Factors
Weight
Rating
Weighted
Score
Strengths
1. ….
2. …

…
…

4
3

…
…
Weakness
3. ….
4. …

…
…

2
1

…
…
Total
1.00
…
…
[Source: Fred R.David (Fourteenth edition-2011), Strategic Management concepts and cases,
Pearson].
1.3.2 Matching stage:
As mentioned above, the nature of this stage is to match the analysis and
evaluation of external environment with analysis and evaluation of internal
environment in order to make feasible alternative strategies as basis for strategic
decisions in the next stage.
The matching stage consists of five techniques that can be used in any
sequence: the SWOT Matrix, the SPACE Matrix, the BCG Matrix, the IE Matrix,
and the Grand Strategy Matrix. These tools rely upon information derived from the
input stage to match external opportunities and threats with internal strengths and

weaknesses. Matching external and internal critical success factors is the key to
effectively generating feasible alternative strategies. In most situations, external and
internal relationships are more complex, and the matching requires multiple
alignments for each strategy generated.
Developing a strategy also means that use strengths to capitalize on
opportunities (offense strategy) and improve weaknesses to avoid threats (defensive
strategy). Every organization has some external opportunities and threats and