Kim long securities corporation formulation of business development strategies in the context of the global financial crisis

TABLES OF CONTENTS
LIST OF ABBREVIATIONS.........................................................................6
LIST OF FIGURE AND TABLE..................................................................6
CERTIFYING STATEMENT.......................................................................8
ACKNOWLEDGEMENTS............................................................................9
ABOUT THE AUTHORS..............................................................................9
INTRODUCTION...........................................................................................9
I. Justification of the necessity of the capstone project..........................................................9
II. Research objectives and applicability..............................................................................11
III. Scope of the research work............................................................................................12
IV. Approaches.....................................................................................................................12
V. Research methodology....................................................................................................13
VI. Structure.........................................................................................................................13

CHAPTER I - THEORETICAL BACKGROUND...................................14
I. Definition of Securities Terms..........................................................................................14
1.1.1. Securities...........................................................................................................14
1.1.2. Securities Company...........................................................................................14
1.1.3. The roles of securities companies.....................................................................14
1.1.4. Business operations of securities companies....................................................14
II. Fundamental issues of strategy and modern business strategy........................................15
1. Viewpoints about strategy.......................................................................................15
1.1.5. Typical features of a strategy............................................................................17
1.1.6. Types of business strategy.................................................................................18
1.1.6.1. Classification of business strategy by levels.........................................18
1.1.6.2. Classification of business strategies by content....................................18
1.1.6.3. Classification of business strategies by process....................................18
III. The role of business strategies in modern business environment..................................19
1. Description of the formulation process of a strategy..............................................19

1

1.1.7. Identification of corporate mission and objectives...........................................20
1.1.7.1. Identification of corporate mission.......................................................20
1.1.7.2. Identification of strategic objectives.....................................................21
1.1.8. Analysis of business environment of a firm (external environment)................21
1.1.8.1. Impacts of external environment on business strategy..........................21
1.1.8.2. Evaluation of the environmental impacts..............................................25
1.1.9. Internal analysis of an enterprise (internal environmental analysis).................26
1.1.9.1. Analysis of the value chain of an organization.....................................26
1.1.9.2. Analysis of financial situation...............................................................27
1.1.10. Strategy formulation and selection..................................................................28
1.1.11. Formulation of strategy by level.....................................................................30
1.1.11.1. Business strategy.................................................................................30
1.1.11.2. International business strategy............................................................30

CHAPTER II – KIM LONG SECURITIES COMPANY’S BUSINESS
DEVELOPMENT STRATEGIES...............................................................31
I. An overview of Kim Long Joint Stock Company............................................................31
1. Development history...............................................................................................31
1.1.12. Development process and important turning-points of the company.............31
1.1.13. Organizational and management structure of the company............................32
II. Analysis of corporate strategy and governance...............................................................34
1. External environment analysis................................................................................34
1.1.13.1. Macro environment.............................................................................34

1.1.13.1.1. Economic environment......................................................34
1.1.13.1.2. Technological environment...............................................36
1.1.13.1.3. Social and cultural environment........................................37
1.1.13.1.4. Political and legal environment.........................................38

1.1.13.1.5. Global environment...........................................................39
1.1.13.2. Analysis of sector environment ..........................................................41

1.1.13.2.1. Situations of sector environment ......................................41
1.1.13.2.2. Summaries of opportunities and challenges in the sector
environment.................................................................................44
Opportunities ......................................................................................44
1.1.13.3. Five competitive forces.......................................................................46

1.1.13.3.1. Threat of current competitors............................................46
2


1.1.13.3.2. Threats of potential competitors........................................50
1.1.13.3.3. The company’s customers.................................................50
1.1.13.3.4. The company’s suppliers...................................................51
1.1.13.3.5. Substitute products.............................................................51
1.1.14. Internal environment analysis.........................................................................51
1.1.14.1. Vision, Mission, motto and objectives of KLS...................................51
1.1.14.2. Business performance results of the most recent three years..............53
1.1.14.3. Key financial indicators......................................................................55

1.1.14.3.1. Analysis of some financial indicators...............................56
1.1.14.3.2. Booked value of the Company..........................................58
1.1.14.4. Business activities...............................................................................58

1.1.14.4.1. Brokerage – Dealing..........................................................58
1.1.14.4.2. Securities proprietary dealing............................................59
1.1.14.4.3. Underwriting......................................................................59
1.1.14.5. KLS share prices.................................................................................60

1.1.14.6. Personnel policy..................................................................................61

1.1.14.6.1. State of human resources in the period (2008)..................61
Departments / Sections........................................................................................................62
Number of certified staff/ total workforce at the beginning of the period..........................62
Number of certified staff /total workforce at the end of the period....................................62
Number of resigned from the company in the period.........................................................62
The number of new recruits in the period...........................................................................62
Board of Directors...............................................................................................................62
4/4 62
4/4 62
0
62
1
62
Brokerage section................................................................................................................62
13/29....................................................................................................................................62
19/32....................................................................................................................................62
6
62
9
62
Proprietary dealing section..................................................................................................62

3


4/5 62
4/5 62
1

62
1
62
Underwriting section...........................................................................................................62
3/3 62
3/3 62
0
62
0
62
Consultancy section.............................................................................................................62
3/12 62
5/13 62
0
62
1
62
Depository section...............................................................................................................62
3/13 62
5/15 62
0
62
2
62
TOTAL................................................................................................................................62
30/66....................................................................................................................................62
40/73....................................................................................................................................62
7
62
14 62

1.1.14.6.2. Workforce and expertise as of June 2009.........................62
1.1.14.6.3. Compensation policy.........................................................63
1.1.14.6.4. Personnel training and attraction policies.........................64
1.1.14.6.5. Recruitment procedures and attraction schemes...............64
1.1.14.6.6. Training schemes...............................................................64
1.1.14.7. PR and Marketing................................................................................65
1.1.14.8. Analysis of sustainable comparative advantages................................66

1.1.14.8.1. Resources and potential.....................................................66
1.1.14.8.2. Formulation of core competencies....................................70
1.1.15. Formulation of KLS key business strategies via SWOT matrix.....................72

4


CHAPTER III – STRATEGIC MEASURES & RECOMMENDATIONS
.........................................................................................................................76
I. Strategic measures............................................................................................................76
1. Strategic options......................................................................................................76
1.1.16. The target of diversification strategy..............................................................76
1.1.16.1. Mitigated risks.....................................................................................76
1.1.16.2. Increased corporate value and competitiveness over key competitors
...................................................................................................................77
1.1.16.3. Strengthened resources........................................................................77
1.1.17. Specification of strategic measures.................................................................78
1.1.17.1. Competitive strategies.........................................................................78
1.1.17.2. New products design...........................................................................79
1.1.17.3. Marketing strategy...............................................................................80
1.1.17.4. International business strategy............................................................83

II. Recommendations...........................................................................................................86
1. To the Kim Long securities corporation.................................................................86
1.1.17.5. Consolidation of risk management system..........................................86
1.1.17.6. Improvement of the organization for the strategy implementation.....86
1.1.17.7. Reform of the administrative structure................................................87
1.1.17.8. Proper assessment and allocation of resources...................................87
1.1.17.9. Improvement of the steering information system for the
implementation of the strategy..................................................................88
1.1.17.10. Strict inspection.................................................................................89
1.1.17.11. Staff training, recruitment and appointment of quality personnel....89
1.1.18. To the macro environment..............................................................................90
1.1.19. To the Industry environment...........................................................................90
III. Obstacles in the course of the studies and future orientation.........................................91
1. Sensitivity of the data..............................................................................................91
1.1.20. Time for studies...............................................................................................91

CONCLUSION..............................................................................................92
BIBLIOGRAPHY.........................................................................................93
I. Books................................................................................................................................93
II. Other Publication.............................................................................................................93
III. Websites.........................................................................................................................94

APPENDICES...............................................................................................94
I. Names and Responsibilities of Group's Members............................................................94
II. Names of Organization and Individual Instructors to the capstone project ..................96

5


LIST OF ABBREVIATIONS

SSC
KLS
SWOT
HASTC
HOSE
ODA
FDI
US
BM
IT
GDP

State Securities Commission
Kim Long Securities Company
Strengths, Weakness, Opportunities, Threats
Ha No Securities trading center
Ho Chi Minh Stock Exchange
Official Development Assistance
Foreign Direct Investment
The United States
Board of Management
Information Technology
Gross Domestic Product

LIST OF FIGURE AND TABLE
1.

FIGURE

6

2. TABLE

7


CERTIFYING STATEMENT
We certify that this research work is our own output, and all the data and results
indicated in it are true and verfiable to the best of our knowledge.
We also certify that the analyses in the studies are elaborated collectively by us
from references and our learnt theories. The views expressed in the research are not
necessarily individual statements of any of us who are officers working for our own
organizations.
Hanoi, June 20th, 2009

8


ACKNOWLEDGEMENTS
We want to convey our sincere gratitude to the

in Vietnam for your guidance

during our course of studies. Besides, we acknowledge the kind support of Kim
Long Securities Corporation in providing us with data and meeting with us so that
we have a practical insight of its strategic planning. At university, we thank the
professors and doctors, who provide us with skills and knowledge on corporate
governance during our whole course. The knowledge is fundamental background
for the elaboration of our capstone project, and useful for our application in real

work. Finally, we are particularly thankful to the valuable tutoring from Sir Sean
Mc Gough – PhD. in our completion of this research work.

ABOUT THE AUTHORS

INTRODUCTION
I.

Justification of the necessity of the capstone project

In 2007, foreign and local investors saw a boom of the stock market in Vietnam
after seven years of its operations. The capitalized value of the securities market,
9


whose composition includes state bonds, represented over 50% of the country's
GDP1 The daily dealing value of the registered exchanges reaches over USD100
million. The initial number of four securities companies established in 2000
increased twenty-fold in 2007. Such surge in the number of securities companies at
the time was a catalyst to make the local bourses more active and sturdy, thus
creating numerous choices for investors.
The emergence of new securities companies, however, adversey influenced the
operations of existing securities businesses as it caused shrinkage in their market
shares. In addition, the removal of the protective barriers to the local financial
services as a consequence of the country's increasing regional and global integration
process posed enormous challenges to domestic securities firms. Many of these
businesses were exposed to being taken over, merged or backing out from the
market unless they became more competitive to challenge their new foreign rivals. 2
At the turn of 2008, the whole world was shocked by the global financial crisis.
After a series of financial scandals in the US and the rest of the world, on

September 15, 2008 Lehman Brothers – an old-aged American bank with a 158
years' operational history collapsed, which marked the biggest bankruptcy ever in
the US3. The catastrophe of numerous take-overs, mergers and other bankruptcies
throughout the world due to mortgage-related losses was looming. These
developments cast doubt on global financial administrators, institutions, researchers
and policy-makers of what had been considered in the past few decades as the
positive side of the new financial management and control theories and approaches.
The situation also caused them skeptical about the growth of the financial markets,
the interaction among different market segments, and the intergration of regional
and global economies and stock markets.

1
2

3

State Securities Commission, 2007 Annual Report
Report of the Working Division on Vietnam WTO admission /Part II – Figure of commitments on
services, the list of MFNS exemptions as provided for in Article I
(June, 7th 2009)

10


The year 2008 ended leaving the developments of the global financial crisis in the
stage so-called “the end of a start ”. Stock markets worldwide were all tumbling,
which caused hundreds of people to lose their jobs and be destitute.
The US and global financial crisis also adversely affected the economy of Vietnam,
and particularly its stock market. The VnIdex suffered a deep consecutive fall of
65%4 in its value from the beginning of 2008. A great many domestic and foreign

investors backed out from the market, and made it almost unliquid.
Rough statistics by the end of 2008 showed that most of local securities firms were
in severe losses. Those businesses formed in 2006 and 2007 were in stagnant
operations due to the gloomy domestic bourse. Their key services such as securities
proprietary dealing, and underwriting were less profitable due to the large drop in
the price of the majority of listed shares over the initial value of the investing
company and booked value of the listed companies.
In this context, the quest for, and development of a sustainable and strategic
instrument to promote business operations of small and medium, and newlyestablished securities companies is essential.
Efficient business strategies contribute to stable and sustainable development of a
securities company while acting as effective instruments to stabilize and boost the
growth of stock markets given the prevailing global financial crisis.
In summary, all of the above stands well justify our choice of the research titled
“Kim Long Securities Corporation - formulation of Business Development
Strategies in the context of the global financial crisis”, which is significant to the
performance of the Company and the domestic stock market as a whole.
II.

Research objectives and applicability

This research work is significant in practice. It depicts comprehensive insight of
KLS’s operations and development trends in the context of the prevailing global
financial crisis and severe competition among securities companies. The capstone
project is targeted to securities companies, and participating organizations and
4

Report of State securities commission of Viet Nam 2008

11

individuals on the securities market - a growing sector that is central interest of
local and foreign investors.
The capstone project provides KLS with a full picture of its business performance
in recent years, an analysis of its business strategies and proposed measures towards
a downsized administrative structure and streamlined investment. All of these
efforts are steered towards the ultimate goal of mitigated risks, increased corporate
value and strengthened resources for KLS in the context of ongoing global adverse
developments.
Beyond these, the paper can be used as a reference for other studies or research
work on the administration of market builders, and KLS’s business efficiency in the
past period. Moreover, the study is theoretically valuable and gives insight of the
new business strategies and operational management modalities of securities
companies, which are in great difference from their traditional strategic analysis and
approaches.
III.

Scope of the research work

Despite the many lessons on business performance of securities companies drawn
from the 2008 global financial crisis, our research work, due to certain constraints
and obstacles, concentrates only on KLS’s business development strategies, which
are in central interest of its Board of Management and other securities firms.
Subsequently, the capstone project content is adhered to studying the factors that
affect KLS's sustainable growth from strategic points of view and given the global
financial crisis.
IV.

Approaches

•

Conduct surveys and collect information for summary and analysis, using
logical approaches;

•

Hold field visits for assessment and comparative studies;

12


•

Conduct consultation with international experts on management of financial
companies and groups, and securities firms;

•

Organize interviews with domestic and foreign specialists, and the
Management securities companies to get their consultation ideas for
improvement of the capstone project's recommendations;

V.

Research methodology

In elaborating the whole capstone project, the dialectical and historical materialism
is utilized in combination with other approaches such as analysis, statistical work,
group survey, scientific abstractionism and illustrative models.

In analyzing the company's financial performance, cross-sectional and time-series
techniques, trend analysis, common-size statements and financial ratio analysis are
tapped.
In other analyses, five forces, SWOT models, and several other theoretical models
are to be presented in Chapter I and used.
VI.

Structure

This research includes three chapters. Chapter one presents the theoretical
background and new approaches of the capstone project. Chapter two is the core of
the whole paper. It provides an analysis and assessment of current performance of
KLS in view of the operations of the entire securities service. It also looks into
some issues of KLS's business strategies and governance, through which constraints
and the roots of such constraints can be identified. The last Chapter gives an overall
briefing of the research work, puts forth measures and recommendations, and points
out arising problems and obstacles that prevent the authors from fulfilling their
capstone project to the desired quality.

13


CHAPTER I - THEORETICAL BACKGROUND
Definition of Securities Terms5

I.

1.1.1.

Securities

Securities are evidence that certify the holder’s legal rights and benefits over the
relevant part of assets or capital of the issuer. Securities shall be in the form of
share certificates, book-entries or electronic data that include
(a)

shares, bonds, fund certificates;

(b)

rights to purchase shares, warrants, call options, put options, future contracts,
and groups of securities or securities indices.

1.1.2. Securities Company
Theoretically, a securities company is an intermediary financial institution that
performs services on the stock market for listing and issuers and investors. A
securities company as defined in the laws is a limited liability joint stock company
established in accordance with the laws and regulations of Vietnam to conduct
business operations described in the business license issued by the State Securities
Commission.6
1.1.3.

The roles of securities companies

•

To develop regulations for mobilization of fund for issuers

•

To enhance efficiency of investments and contribute to reduced time

•
•
•

consumption and mitigated risks via their consultancy services
To contribute to formulation of stock markets and regularization of prices
To contribute to increased liquidity of financial products
To provide information to administrative authorities for their control of the
stock market
1.1.4.

a.

Business operations of securities companies

Securities brokerage

5

Securities Law No 70/2006/QH11, Chapter 1, Article 6

6

Securities Law 70/2006/QH11

14

Securities brokerage is the service in which a securities company acts as an
intermediary to carry out securities buying or selling orders on behalf of its
customers.
b.
Securities depository
Securities depository is the receipts of securities deposited by customers,
safekeeping of customers’ securities, and delivery of securities to customers and
giving assistance to customers to exercise the rights related to their ownership of
securities.
c.
Underwriting
Underwriting is the service in which the underwriter commits to the issuer to
completing the procedures prior to a securities offering, to buying a part or all the
securities of the issuer for resale or to buying the remaining undistributed portion of
securities from the issuer; or to assisting the issuer in distribution of securities to the
public.
d.
Securities investment advisory
Securities investment advisory is the service in which securities companies provide
investors with information such as securities analysis results, publication of analysis
reports and securities-related recommendations.
II.

Fundamental issues of strategy and modern business strategy

1.

Viewpoints about strategy

From the traditional viewpoint of Michael Porter 7, a strategy can be defined as “the

study to identify the most suitable competitive position for an industry, and major
scope of activities where competition is present”. Strategy, according to him,
emphasizes the point of competition.
Alfred Chandler – a professor from Harvard University 8 has another idea.
“Strategy", in his view, "is to define long-term key goals of a company, action
programs and allocation of necessary resources to achieve those goals”.

7

Porter,M.E. (1981). The contribution of Industrial Organization to Strategic Management. New York:
Wiley.
8

(June, 10, 2009)

15


James Quinn9 from Dartmouth University defines “Strategy as the model or plan of
an organization to integrate steering goals, corporate policies and priority order of
actions in a unified entity”.
William F. Gluek10 is of the view that “Strategy is a unified, comprehensive and
integrated plan designed to ensure a firm's achievement of its business targets”.
Planning-based strategy development approach is no longer in fashion. Practice
shows that detailed plans that are formulated formally sometimes fail, and
contingency plans, therefore, are needed in the business operations of a company. In
this regards, traditional viewpoints show certain weaknesses. Strategy, in its nature,
is a science and a tactic in achieving targets. Such nature, however, is not
emphasized in the above viewpoints.
In such context, newer concepts of a strategy gradually replace the traditional ones.

Endeavours have been made to reflect the nature of the term "strategy" in these
concepts while ensuring its compatibility with the changing business environment.
With this approach, the modern concepts do not emphasize the projection and
planning aspects but rather the selection of strategies that respond to the targets set
out by an organization.
It is obviously uneasy to give a clear definition of a strategy. Yet this problem can
be solved if attention is paid to each strategy’s factors, which are meaningful for
any organization. In any circumstance, these factors depend strictly on the current
situation of each enterprise, member organization as well as organization structure.
It is necessary to separate the definition of a strategy and the strategy formulation
process in order to have a unified definition with the assumption that we had a
consistent strategy with goal, orientation and could face with changes in a
fluctuating environment.

9

Quinn, J., B. (1980). Strategy for change: Logical Inscrementalism; Homewood, Illinois, Irwin

10

Lawrence R. Jauch and William F. Gluek(1989) Business Policy and Strategic Management

16


1.1.5.

Typical features of a strategy

It can be seen that the concepts of a strategy are varied. Yet, a strategy, from any

angles and at any time, has some most typical features that reflect the nature of the
business strategies of an enterprise specified below:
•

A business strategy must clearly define the key goals to be achieved in
specified periods and must grasped at all aspects and levels of the production
and business activities of an enterprise.

•

Business strategies must be reflected in a continued process from
development to achievement, assessment and review, and adjustment of the
set goals.

•

A business strategy must ensure optimal mobilization and full exploitation of
the firm’s resources like manpower, capital, technique and technology; and
ensure that the firm's advantages are promoted and opportunities are grasped
to gain comparative advantages in the market.

•

A strategy is an instrument that sets out long-term objectives of an
enterprise; and

•

A business strategy defines the clear scope of competition of an enterprise.

The essence of this characteristic is to identify clearly the business scope of an
enterprise. This is an important step of an enterprise in reflecting business
environment, positioning strategies, allocating resources and administering its
investment portfolio. Two basic questions raised are:
What are we trading in? and What should we trade in?
This is a relatively complex problem since the market segmentation has a great
impact on identification of organizational structure of a company.
•

A business strategy creates interaction between opportunities and threats of a
company, and between its strengths and weaknesses, from which its
competitiveness is built.

This feature highlights a key aspect of strategy – the long-term sustainable
competitive advantage of a firm over its major competitors in the involving

17


business sector. It is a modern approach to make a research on competition status of
an enterprise.
1.1.6.
1.1.6.1.

Types of business strategy
Classification of business strategy by levels

The common level-based classification of a strategy is:
•

Company (overall) strategies are the strategies formulated for the whole
company in all the sectors that it deals in. The objectives of the strategies of
this type demonstrate the ultimate goal that the company is pursuing from its
overall performance, directions and measures to achieve the goal.

•

Business (sectoral) strategies are designed for a niche specialized business
sector. When a company deals in one business sector, its business-level
strategy is identical with its company-level strategy.

•

Functional strategies are the strategies of specific service of a company such
as financial, marketing, and personnel, etc. Functional strategies are
supportive in achieving the success of business and company strategies.
1.1.6.2.

Classification of business strategies by content

Based on contents of strategies, French administrators divided business strategies
into the following types:
•

Commercial strategies are strategies applied in all trading activities of a
company from purchase of supplies to distribution and consumption of its
outputs.

•

Technological and technical strategies

•

Financial strategies

•

Human strategies describe directions and ways to mobilize and use human
resources for successful implementation of the above strategies.
1.1.6.3.

Classification of business strategies by process

Business strategies include

18


•

orientation strategies that indicate major orientations on a firm's targets, its
directions and ways to achieve such targets. The strategies are built upon the
analysis of the internal and external environment of an enterprise. They steer
the key strategic options of a firm.

•

action strategies that comprises of action alternatives of an enterprise in a
specific situation and expected adjustments of the strategies. Action

strategies can be selected from the ones formulated in the development of
orientation strategies, or from the strategies established during the
performance of orientation strategy.

III.

The role of business strategies in modern business environment

In modern business environment, strategies play an increasingly important role in
the existence and growth of an enterprise.
Strategies are a tool to reflect collectively all the long-term goals of an enterprise.
These goals are the ultimate targets that the firm wishes to achieve in its business
performance. Specification and documentation of such targets in the form of
strategies helps every member of the enterprise be fully aware of where they want
to go, and what they need to do. Consequently, this contributes to the
accomplishment of the firm's targets.
1.

Description of the formulation process of a strategy

Although there are various viewpoints of the various formulation approaches of a
strategy, a normal process
is composed of the following steps:
Formulation
Implementation
(Decision on what to do)

Identification of opportunities
and threats

Identification of material,
technical, financial &
managerial resources of the firm

Human values and
determination of the leadership

Affirmation of non-economic
responsibilities to the society

(Achieved results)

STRATEGIES
OF THE
COMPANY:

Types of
objectives and
policies to
identify the
Company and
the business
fields of the
Company

Structure of the enterprise and
relations:
Assignment of labors, cooperation
between sections, information system
Organizational and behavioral

procedures
Measurement standards and methods,
dynamic system

19
Inspection system
The highest leader of the Company

Screening and Promotion

Strategic- Organizational
Characteristics


Human Resources

Figure 1.1 – Business strategy formulation procedure
1.1.7.
1.1.7.1.

Identification of corporate mission and objectives
Identification of corporate mission

Before looking into this issue, a question raised is what are the objectives and
mission of an organization?
Corporate objectives of an organization are considered as reasons for its existence.
The approaches of strategists, therefore, to target issues will steer the formulation of
a strategy and influence its content.
The regular formulation of a mission statement is a continuous process that has six
steps:

Step 1: Initiate initial idea of a business mission
Step 2: Assess external environment and review internal conditions
Step 3: Re-define the idea of a business mission
Step 4: Rewrite the mission statement of the company
Step 5: Organize the implementation of the mission statement
Step 6: Review and revise the mission statement
In writing the mission statement, it is necessary to take into account not only the
wishes of the owner, the leaders, but also the internal and external factors of the
company.

20


1.1.7.2.

Identification of strategic objectives

A company's objectives present clear orientations that it pursues, and influences its
business performance. For example, the increase of 15% in the company’s market
share requires various actions to enhance its productivity. Corporate objectives are
also good incentives. For instance, to achieve the revenue of one billion in the next
year can be a challenge to an enterprise. Finally, a company's objectives are used as
an instrument for assessment and control. It allows the company to check whether
the planned business outcome is consistent with its requirements like whether the
delivery of the commodity can be contracted within two weeks. This allows the firm
to take rational actions to get the desired outcome such as improved production and
storage and reduced order and delivery time, and raised sense responsibilities at
work.
Target has also central role that is the result of comparison. For each enterprise,
target can be long-term, medium or short-term. Economists assumed that an

enterprise fixes its targets in eight main sectors as follows:
Market position; Renovation; Capacity; Financial and logistics source; Profits;
Personnel development and efficiencies; Employee attitudes and efficiencies; Social
responsibilities;
The absence of one of the eight foregoing sectors shall lead to serious consequences
to the whole enterprise. In order to fix short-term targets and not to harm long-term
ones, a balance between these targets is required.
1.1.8.

Analysis of business environment of a firm (external
environment)

1.1.8.1.

Impacts of external environment on business strategy

External environment includes factors that may affect the performance of targets of
an enterprise. The analysis of the external environment comprises of macro
environment and sector environment (micro). The analysis of such factors shall help
an enterprise identify its position and environmental properties, the existence age,

21


determine influences of the external environment and its targets, then be able to
make decisions in planning of strategy.
Macro environment:
Macro environment includes various factors that have indirect impacts on activities
of an enterprise through its influences on factors of the sector environment, of
which there are 5 factors considered by administraters as those that influence most

strongly, that is: economic, institutional, legal, technological, social and natural
factors.
•

Economic factors: have great influences on enterprises and the most
frequently movable factor, the most difficult factor to forecast among macro
ones. Its movement always contains both opportunities and challengies for
enterprises, of which the following moving trends are the most prominent:

-

GDP and GNP trend: directly affects the growth rate of the economy, the
growth of disposable income of the population. It shall make changes in
consumers’ needs, consumption market scale, affecting demand-supply
balance of products.

-

Interest: is a factor that have impacts on consumption saving and investment
trends; make consumption needs rise up or slide down, stipulate or limit
investment in production expansion.

-

Inflation rate: affects prediction possibilities of investors, high inflation rate
shall make prediction more difficult, investment more risky, bringing about
reduced investment, production and having impacts on sector competition.
Balance of payment, exchange rate: affect the market and external economic
relations of an enterprise; sometimes result in the change in economic state
in general.

•

Economic policies present opinions of the Government in the sector
development.

•

Institutation and legal factors

•

Technological factor

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•

Social, population, custom, preference factors, etc directly affect
consumption needs of the society.

•

Natural factor: is an important factor in human life, at the same time is an
input supply for many production sectors. Natural factor is considered as the
least varible factor. However, in the past decade, the natural environment has
been seriously deteriorated. This may have great impacts on movement trend
of enterprises.
Sectoral environment:

Sector environment closely attaches activities of an enterprise, factors of the

operation environment shall decide the investment environment, competition
strength and profits in the sector. According to professor Michael Porter, the
context of the operation environment is subject to influnences of five competitive
forces: risk of penetration of potential competitors, competition strength of
companies in the sector, power of buyers, power of sellers and threats of alternative
products.

Threat of new entrants

Bargaining
power of
suppliers

Competitive
rivalry within
the industry
Density of
competitors

Bargaining
power of
customers

Threats of
substitutes
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Figure 1.2 – Michael Porter's model of five competitive forces11
-

Threat of New Entrants: are companies that are currently not participating in
competitive rivalry within but are likely to penetrate into the industry. Their
appearance shall increase competitive intensity, decrease profits within the
industry. The penetration capacity of potential entrants will depend on the
extent to which there are barriers to entry. The higher penetration barriers
are, the easier it is for other companies to enter this industry and vice versa.
According to Joe Bain12, there are three major barriers hindering the
penetration namely Brand loyalty of customers, absolute cost advantages,
and economies of scale. If an enterprise has suitable strategies to enhance
penetration barriers in to the industry, the penetration threat of latent entrants
shall be restricted.

-

Existing players:

Existing players are regular pressure and direct threat to companies. The more
aggressive the competition of existing players within the industry is, the more
profit-making capacity, their existence and development are threatened. It is such
latent competition that existing companies within the industry keep enhancing
investment costs with an aim to differentiating their market-access products,
services or reducing their prices. The competition intensity within the industry often
depends on the following factors:
The number and capability of companies within the industry:
The number and capability of companies within the industry decides competition
nature and intensity within the industry. In the industry with big companies of
equivalent capabilities, the competition tends to be fierce and much more inclines to

a price war. In the event of only a few influenced companies prevail; they tend to
have connections with each other to control the market, which makes less
influenced ones reluctantly follow playing rules set out by the prevailing.
11

M.E. Porter, Competitive Strategy (New York: Free, Press, 1980

12

J.E. Barriers to New Competition (Cambridge, Mass: Harvard University Press, 1956) For a review of the
modern literature on barriers to entry, see R,J. Gilbert, “Mobility barriers and value on Incumbency” in R.
Schmalensee and R.D. Willing, Handbook of Industrial Organization, (Amsterdam,, Holland 1989),I.

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Market demands: Demands for products and services of companies greatly affect
the competition intensity. When product demands tend to increase, companies find
it easier to protect or expand their market shares, thus the competition appears less
severe. Conversely, when the demands tend to decrease, companies shall be
indispensably involved in a fierce war with other companies if they want to protect
their market shares and expand the market.
The costs are higher and higher, which makes companies more difficult to leave the
industry, thus they have no other choices other than involving in a decisive battle
for existence. This makes the competition intensity higher and higher, esp. for
industries at maturity or degeneration stages. In the event of low withdrawal
barriers, the competition intensity tends to drop.
Apart from the foregoing factors, the competition intensity also depends on others
such as the differentiation of products, services among companies within the
industry, the growth rate of the industry, entry betting, and fixed costs, etc.

1.1.8.2.

Evaluation of the environmental impacts

To evaluate the environmental impacts, quantitative assessment of the impact of
environmental factors on operations of companies is widely used, in which factors
are synthesized through a five-step procedure:
Step 1: Make a list of factors decisive to the sucess of companies
Step 2: Assess the importance of each factor to the industry
Step 3: Identify the weight of each factor in relation wiht responsive capability of
companies’ current strategies or the importnace to the companies
Step 4: Scale the marks of each factor
Step 5: Calculate the total marks
The total marks shall reveal impacts on the environment on companies, thereby
identifying opportunies and challenges companies are now facing. This is the basis
to formulate business strategies to ensure the suitabilites of the strategies and the
mobilization environment.

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