Development strategic alternatives

Developing strategic alternatives of a firm is the most important issue in management. Analyzing the strategic profile is an important step toward generating strategic alternatives.

1 Chapter 1 Introduction 1.1 Background Developing strategic alternatives of a firm is the most important issue in management. Analyzing the strategic profile is an important step toward generating strategic alternatives. In other words, it is the performance of the firm referred to in terms of return on investment, overall market share, profitability trends etc The strategic profile analysis also indicates the scope of activities and the firm's competitive advantage, and thereby enables effective planning for the future. Today, the role of state enterprises is still very important in the economy, with total capital investment of 44,964 billion VND and with a revenue of 108.372 billion VND last year 1 . Although the economy has changed from the command economy to the market economy and an open door policy has been implemented, the Government's policy insists that state enterprises should maintain a central role in the economy and have a special role in economic growth. In recent years, generally, state-owned enterprises' economic efficiency has dramatically decreased. Consequently, some have gone bankrupt, and the rest are struggling to survive. According to the latest national statistics, there is a total of 6,544 existing, of which only 20% operate profitably, 30% are breaking even and nearly 50% continue to suffer losses. 2 Hence, it's necessary to turn around failing companies. However, by continuing to consolidate and reorganize the economy, the government signed decree No. 388/ HDBT, according to this decree, state enterprises are rearranged on orientation of production. That gave favorable conditions to them so as to upgrade business activities in the market mechanism. There are many that have emerged and achieved success in the market economy, especially, such as agricultural and fishery product processing export companies in Mekong delta area and Ho Chi Minh city. 1. 2 Statement of the problem: According to the assessment of the economic analysis printed in the economic development review magazines of Vietnam, in the past years, state-owned enterprises in Vietnam face three major problems: 1.2.1 There is no uniform indices system used in the analysis of an industry. A system can be understood as an entity made up of two or more independent indices that interact to form a functioning organism. A system analysis is the method used to solve business problems by identifying the major parts of the problem and their relationships. In financial analysis, for example, assessing return on assets requires 1 - The Vietnamese General Statistical Office, Annual report, 1994 2 - The University of Economics of HCMC, Economic development Review, June 1994 2 considering the impact of all related elements such as sales, cost of goods sold, assets, as well as changes of each will affect the result of operation. Therefore, the lack of an indices system for analyzing an industry has not only limited the ability to appraise a company's performance, but also distorted economic efficiency of each industry and the whole economy. Therefore the Government might not aggregate the level of outcome of each industry exactly. Consequently, there is no suitable plan to develop any industry. 1.2.2 Top management has not appreciated the importance of strategic analysis: In particular, managers in state enterprises seem not interested in their responsibility to manage and control the firm's operation, because they are subsidized and given preferential treatment by the Government, and face only weak competition. Therefore, they usually count on the Government and are less energetic. The management style does not encourage managers to work hard and to take risk. Not rewarding good performances nor punishing for breaking the rule does not motivate people towards higher productivity. Therefore, they are risk-averse, and this has led to the current situation where companies do not record high growth. 1.2.3 Information systems are not based on scientific techniques: As a result, financial reports are often late and inaccurate; the cost structure of finished goods is a complex issue, and different from one company to another. Therefore, yearly information system is often not in time for decision making, or planning in the next period precisely. This leads to limitation of economic development not only in each industry but also in the whole economy. 1.3 Objectives of the study: The general aim of this research study is to analyze the strategic profile and assess the performance of one Vietnamese state-owned enterprise in order to propose new strategic alternatives for the enterprise. The specific objectives of this study are: 1.3.1 To analyze the financial and market performance of the company. 1.3.2 To conduct external and internal analysis of the company (S.W.O.T. analysis). 1.3.3 Based on (1) and (2) develop strategic alternatives for the company. Based on the results of the analysis and assessment of the company's operation, consider the impact of environment then offer concrete orientation for the company on how to adapt to the current economic environment, to enhance the company's economic efficiency in the future. 3 1.4 Methodology 1.4.1 Data collection in this research has been obtained from the following sources: a) Internal sources: These include all data relating to the business operations being examined such as : annual financial report, sales , product volume trends etc ., the data obtained by conducting interviews with top management and middle management of the enterprise. b) External sources: These include all information that are not available in the enterprise, this information can be obtained from secondary sources,such government data, trade association data, and publication and other sources related to the case study selected. 1.4.2 Based on the interviews with the company and referring to the sources of printed information , I propose: a) To describe the organizational structure , management of the enterprise. b) To collect and transfer accounting and financial data such as profit and loss statement, balance sheet and related information of the company and interpreting into the suitable data by recalculating the number of indices. It is necessary to do so because there are some differences between Vietnamese accounting, financial reports and the method of calculation indices and modern Accounting. c) To analyze the impacts of current and future environment such as policy, legal , economics , social culture, technology and distribution. 1.5 Framework of the study This study is implemented over four steps , which involves: 1.5.1 Get information or data -Company is contacted , observed and asked for information directly about finance, organization, personnel, production, marketing. - Information from the similar companies are collected. - Secondary data involves statistics reports. - Environmental information. 1.5.2 Aggregating , calculating and interpreting data. Financial ratios are calculated based on the needs of analysis. In this study, financial ratios are used in a limited number that suits to the company' s characteristics, and the company's performance. Analyze the strategic profile of the company. 4 1.5.3 Analysis - Financial ratios. - Internal environment: Strengths, weaknesses. . Organization structure. . Personnel. . Marketing. . Production. - External environment: Opportunities, threats. . Economic. . Technological. . Political. . Social. 1.5.4 Development strategic alternatives Based on internal and external analysis and enterprise 's capabilities in order to develop strategic alternatives. The framework of the study is presented in figure 1. 5 THE COMPANY Financial analysis Interview personal assessment Financial data Collect data annual reports Policy / legal Economic Social / cultural Market Technology Distribution. CAPABILITY, STRATEGIC PROFILE Accounting data Financaial Ratios NEW STARTEGIC ALTERNATIVES Opportunities & Threats Strengths &Weaknesses Analysis Environment trends Capability assessment, qualitative analysis Analysis based on research/ data within company Analysis based on research out of company COMPETITOR Analysis Figure : 1 FRAMEWORK OF THE STUDY The framework of the study that is arranged in order such steps, is proper in using case study analysis and strategic audit. 6 On the basis of this framework, the analysis is begun from narrow and specific questions to broader issues, through that we can assess the enterprise' capability and how external factors influence the enterprise's business operation in order to develop strategic alternatives properly. 1.6 Scope and limitation of the study Due to the limitations of time, financial budget, traveling and information, the scope of this study is limited to a state-owned enterprise in the South of Vietnam. Because financial accounting methods vary greatly from industry to industry, the results of this study are not generalizable across industries, and are therefore applicable only within this industry. The difference between the Vietnamese accounting system and modern accounting system, that I have been taught in the program. This difference requires that we interpret Vietnamese data in a manner to be able to analyze the company's performance precisely. The method of strategic analysis is not perceived important in the state-owned enterprise, so there is no uniform method of analysis among the companies in the same industry. 1.7 Organization of the study report This study is organized as follows: Chapter 1 is the introduction including background, problem statement, objectives, methodology, framework , scope and limitation of the study. Chapter 2 Presents literature review pertaining to the topic. This review provides a background on the financial analysis, on the marketing, on the strategy and strategic profiling. Chapter 3 Gives an overview of the enterprise's operations under study.(A case study.) Chapter 4 Provides an analysis of the current situation of the company' s performance and environment in which the company's operating. Chapter 5 Covers the outcome of the study in terms of internal and external analysis, evaluates the strategy and the performance including developing strategic alternatives Chapter 6 Conclusion, provides practical recommendation to the enterprise. Chapter 2 Literature Review 7 In this chapter, we shall review some literature that is directly relevant to the topic and the content of this research study. The reviews are to be sequenced as follows. 2.1 Definition of state enterprise Hanson (1965) defined a state - owned enterprise as state ownership and operation of industrial, agricultural, financial and commercial enterprises. According to him, state-owned enterprises are owned and controlled by the central Government, (in a unitary state) or by the central and regional Governments ( in a federation ). Other definition is translated from economic dictionary of Research and Interpreted, HCMC (1994), state -owned enterprise is a basic production unit of the economy that is owned and controlled by the Government based on the producing plan within the national plan of the country. Chwee Huat Tan (1974 ) , in his study on public enterprise in Singapore, gave a definition of public enterprise or state owned enterprise as an economic enterprise in which the government participates in ownership and management. It can be solely owned by the government and operates as an autonomous body or joint - stock limited liability company in which other investors, foreign or local, participate in ownership and management. From these definitions, Chwee Huat Tan 's definition is proper with the Vietnam government policy in the current economic situation. 2.2 Characteristics of state enterprise in Vietnam In Vietnam , State enterprises' operation based on the government's policy. It is also like in most countries, State - owned enterprises were established in order to undertake projects to solve major socio- economic problems. There are two types of state enterprise, according to the percentage of the government's capital invested in the firm. State enterprise is distinguished as the following: State-owned enterprise: the Government invests the whole initial capital in the firm. Public enterprise: the Government only invests a part of initial capital and the rest of the capital's demand will be mobilized from other sources, such as from individual, investors . inside or outside the country, but the percentage of the government 's capital investment must be insured that firm is under the leadership of the government. According to the decree No 388/HDBT, issued on November 20 - 1991 by the Council of Ministers about dissolving and establishing state enterprises : + State enterprise is a business organization that is established, invested and managed by the government. + State enterprise is an economic corporation operating in accordance with law and equality in the law. 8 + State enterprise operates in accordance with the government 's direction; carries out economic policy. + Duties of state enterprise: To operate business in line with registered industry and the purpose of business establishment. To keep and develop subsidized capital. To carry out the duties and obligations that are assigned by the government. To carry out allocation of interest in accordance with labor; to take care of the work force 's spirit and matter living; to train and enhance the level of culture, science, technology and professional skills of workers. To protect business, production, environment; to guard political security, order safe society; to do thorough obligation for national defense . 2.3 Definition of strategy According to the Traditional Approach there are some definition of strategy 3 . - Harvard's Alfred Chandler (1962) defined strategy as " the determination of the basic long term goals and objectives of an enterprise , and the adoption of courses of action and the allocation of resources necessary for carrying out these goals". Chandler points out that corporate strategies of firm in the United States follow single business, geographical expansion, vertical integration, and diversification. - James B. Quinn of Dartmounth College (1980) defined strategy as " the pattern or plan that integrates an organization's major goals, policies, and action sequences into a cohesive whole". - William F. Glueck (1980) defined strategy as " a unified , comprehensive, and integrated plan designed to ensure that the basic objectives of the enterprise are achieved". - Andreww (1980) defines corporate strategy as " a pattern of decisions in a company that determines and reveals its objectives, purposes or goals, and defines the range of business the company to make to its shareholders, employees, customers and communities .The interdependence of purpose, policies, organization action is crucial to individual strategy". For the purpose of analysis , he divides strategy into formulation and implementation. As formulation, he matches the opportunities ( what company might do ) and corporate capability ( what company can do ). the optimal equilibrium strategy with the acceptable level risk - he calls economic strategy. According to New Approach, Mintzberg (1987) defined strategy as " plan, ploy, pattern, position, perspective." As plan, strategy deals how leaders establish direction for organization, to set predetermined of action. As ploy, strategy takes us into the real of direct competition, where threats and trick and various schemes are employed to gain advantage. As pattern, strategy focuses on action. As position, strategy encourages us to look at organizations in their competitive environment, avoid it or destroy it. As perspective, strategy referred as strategic intent. Henderson (1989) defines strategy as a deliberate search for a plan of action that will develop a business competitive advantage and compound it. 3 - Charles W. L. Hill & Gareth R. Jones, Strategic management, 1989 . p 5 - 6 9 2.4 Environmental analysis Environmental analysis is the process of monitoring the organizational environment to identify both present and future threats and opportunities that may influence the firm's ability to reach its goals. The purpose of Environmental analysis: Although the procedures used to perform an environmental analysis differ from different organizations, the most of firms have the same main reason for performing. In generally, their purpose is to assess the organizational environment so that management can react to it appropriately and thereby enhance organization success. A company 's external environment can be broken down into two parts: the industry environment that the company competes in and macro environment. A company's industry environment consists of elements that directly affect the company, such as competitors , customers and suppliers. The macro environment consists of broader economic, social, demographic, political, legal and technological setting within which the industry and the company are placed. 4 Both environments and their relationship to the company are illustrated in figure 2.1 4 - Charles W.L. Hill & Gareth R. Jones, Strategic Management, 1989. 10 Industry environment Competitors Customers Suppliers Substitutes FIRM Macro - environment Economic Demographic Social Global Political / legal Technological Industry environment Competitors Customers Suppliers Substitutes FIRM Figure : 2.1 ENVIRONMENTAL ANALYSIS Source: Charles W.L. Hill & Gareth R. Jones (1989), Strategic Management. 2.5 Role of environmental analysis in organizations 2.5.1 The policy oriented role The main purpose of a policy - oriented environmental analysis is to improve organizational performance by simply keeping top management informed about major trends emerging in the environment. 2.5.2 The integrated strategic planning role [...]... Developing strategic alternative: ( strategic planning) According to Peter Lorange (1980) There are five stages of planning for identifying environmental opportunities and threats, for narrowing down our strategic options to recognize our own strengths and weaknesses, for monitoring progress toward the chosen strategic options, and for providing management with incentives for contributing toward the strategic. .. providing management with incentives for contributing toward the strategic direction Strategic planning involves these five stages that are objectives setting, strategic programming, budgeting, and linking to managerial incentives - Objectives setting serves primarily to identify relevant strategic alternatives Where or in what strategic direction the firm as a whole as well as its organizational sub units... threats - Strategic programming relates to the development of strategic programs for achieving the chosen objectives During the objectives setting step , that is where we intended to go , and in this step is how to get there A first aspect of strategic programming at the functional levels of a firm's business should be intellectual challenge, calling for imagination, skill, and professionalism Strategic. .. faced with making a business decision The presentation of case analysis can be organized on the basic of several frameworks One obvious framework is Strategic Audit to be used in this study research 2.7 Strategic audit 12 Strategic Audit is used not only in strategic decision making , but also a framework for the analysis of a complex business policy case ( J D Hunger and T.L Wheelen, 1983) The audit... standards for judging the success and appropriateness of a strategic program that tend to be based largely on criteria associated with each function and not on cross functional success criteria A successful strategic programming effort is of course critical for the development of a useful overall planning approach even the most brilliant perceptions about strategic direction are useless unless they are followed... to attack unstructured problems in a novel and imaginative way Typically, strategic programs are inter-functional in their nature, requiring coordinated inputs from different functions, such as, R&D, manufacturing, distribution, and marketing A second aspect of the strategic programming process relates to the need, to evaluate strategic programs, to determine how well a particular program seems to contribute... the strategic analysis of any business corporation Some questions or even some areas might be inappropriate for a particular case; in other cases, the questions may be insufficient for a complete analysis However, each question in a particular area of the strategic audit can be broken down into an additional series of sub questions It is up to us to develop these sub questions when they are needed A strategic. .. range of feasible strategic moves other firms could initiate, and each competitor 's probable reaction to the array of industry changes and broader environmental shifts that might occur Sophisticated competitor analysis is needed to answer such questions as "Who should we pick a fight with in industry, and with what sequence of moves ?" " What is the meaning of that competitor's strategic move and... also called the operating plan or the action programming stage After a set of strategic programs has been chosen, a more detailed set of action programs will have to be established for the next year The purpose of the budgeting stage then is above all to establish a pattern of activities for the near term execution of the strategic programs, assigning specific tasks to various organizational units and... in a shared direction toward a long-term strategic position advantageous to the firm For this to be possible, there must be at least some degree of congruence between the personal goals of each individual key manager and the corporation's goals Clearly, given that the key managers themselves are instrumental in the formulation of objectives and goals as well as strategic programs, the personal beliefs . 1.5.4 Development strategic alternatives Based on internal and external analysis and enterprise 's capabilities in order to develop strategic alternatives. . framework is Strategic Audit to be used in this study research. 2.7 Strategic audit 12 Strategic Audit is used not only in strategic decision