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This study will begin with a review of literature which concerns the strategic management process, particularly the process of strategy formulation
Chapter 1 Introduction If we could first know where we are and whither we are tending, we could better judge what to do and how to do it. Abraham Lincoln. The purpose of this chapter is to introduce the major problem of this study, formulating a development strategy for Binh Minh Plastic Company in the long-term. Research objectives, scope and limitations, methodology and framework, as well as organization of the study are also presented accordingly. 1.1. Background Thanks to the “open door” economic policy, as other industries, the Vietnam Plastic Industry has developed quickly in recent years. Never before have household plastic products been so abundant and cheap. This situation benefits the consumers but reduces the profit of producers. Because of strong competition, profits drawn from plastic production have plummeted from 5-7% of sales to 1-2% presently. If this competition of prices keeps up, the customer may in turn be adversely affected if poor-quality and low-grade products are put on the market. Besides, there are signals of surplus of many plastic items: PP bags, foamed plastic containers and PET bottles, resulting in a wasted investment capital. A few products have large capital investment which has led to the overabundant production capacity in the short-run. Other products lines have not been affected. The general conclusion of the Plastic Industry’ s managers concerning this situation is that it is the logic consequence of the development of the open market resulting from lack of the management at the macro level. What needs to be done to correct and improve this situation? Clearly, the Vietnam Plastic Industry needs a development strategy in the long-run. This problem will be illustrated more clearly through the case of Binh Minh Plastic Company. Although considered as one of the successful companies in the plastic industry, Binh Minh Plastic Company has also faced with various difficulties, particularly the lack of the vision for a strategy in the long-term. 1.2. Problem Statement Based on the examination and analysis the external and internal environment, this study will formulate a development strategy for the Binh Minh Plastic Company in the long term. 1.3. Objectives This study aims to establish a development strategy for the Binh Minh Plastic Company. Specifically, it aims to accomplish the following: 1 1. To identify strengths and weaknesses as well as opportunities and threats that the Binh Minh Plastic Company has been faced with. 2. To assess the current strategic situation of the company in order to develop its competitive profile. 3. To establish a strategy to develop the Binh Minh Plastic Company in the long term. 1.4. Scope and limitations of the study This study is about the Binh Minh Plastic Company, specifically about PVC pipes, the main product of the company. It focuses on the formulation the development strategy for the company in the long-term. The depth of this study depends partly on the availability of the key data of the Vietnamese economy and the Plastic Industry in general, especially of Binh Minh. It also depends on cooperation from the company and faces resources constraints. 1.5. Methodology and framework of the study This study will begin with a review of literature which concerns the strategic management process, particularly the process of strategy formulation. It also mentions to the concepts and principles of the Porter Model to analyze the competitive environment of the industry. Necessary data for this study were collected from 2 main sources: • Primary data: Interviews in-depth with managers, key persons of the Vietnam Plastic Association (VINAPLAST), Binh Minh Plastic Company as well as other specific plastic companies. Annual reports and other relevant data were also collected. • Secondary data: Relevant data about the plastic industry and the Vietnam economy will be collected from the National Statistics Office, Ho Chi Minh City Statistics Office, Ministry of Industry, Ho Chi Minh City Department of Industry as well as from newspapers, media, etc. The framework of this study can be illustrated by Figure 1.1. 2 3 GENERATION, EVALUATION, AND SELECTION OF THE BEST STRATEGY CONCLUSIONS AND RECOMMENDATIONS PROBLEM STRATEGY FORMULATION PROCESS PORTER’ S INDUSTRY ANALYSIS MODEL S I T U A T I O N A N A L Y S I S Scan external environment Evaluate current performance results Scan internal environment Opportunities Threats Strengths Weaknesses Figure 1.1 Framework of the study Analyze the competitive environment L I T E R A T U R E R E V I E W 4 1.6. Organization of the study The study is organized as follows: Chapter 1 provides an introduction including the rationale of the study, the identification of the problem, the objectives, the scope and limitations as well as the methodology and framework of the study. Chapter 2 shows the literature review of the topic being considered. This will encompass the fundamental ideas on strategy, strategic management, strategy formulation process as well as the Porter Model for analyzing industry. Chapter 3 provides an analysis of external factors that help to indicate the company’s strategic position. The main contents of the chapter will deal with the current situation and strategic orientation for the Vietnam Plastic Industry in the future. It also mentions about the structural analysis of the pipe industry, the main area of competition of Binh Minh Plastic Company. Chapter 4 deals with the current analysis of the Binh Minh Plastic Company in terms of organizational structure, production, sales, marketing and finance. The ultimate goal of the chapter is to identify strengths and weaknesses of the company in order to locate its present competitive position. Chapter 5 is devoted to the expected outcome of the study to develop the strategic alternatives based on the analysis from previous parts, that will help the company achieve outstanding performance in the next few years. Finally, Chapter 6 deals with practical recommendations on the implementation of the selected strategy. Chapter 2 Literature Review Strategy is when you are out of ammunition, but you keep right on firing so that the enemy won’t know. Author Unknown. The chapter mentions major theoretical bases to apply for analyzing practical situation of Binh Minh Plastic Company and then formulating the development strategy for it in the following chapters. The section consists of the strategy management process, structural analysis of the competitive environment and selection of development strategies. 2.1. Strategic Management Process Strategic management is a fast-developing field of study. It looks at the corporation as a whole and attempts to explain why some firms develop and thrive while others stagnate and go bankrupt. Strategic management typically focuses on analyzing the problems and opportunities faced by people in top management. Before mentioning in detail about the process of strategic management, specially the strategy formulation stage, firstly, we try to answer the question: “What is strategy ?” 2.1.1. Definition of strategy Starting from its military root, strategy, ever considered as “the science of planning and directing military operations”, is not a new term. However, applications of this concept into business area is a breakthrough idea took place in the later half of this century. In the decades of 1960s and 1970s, most management definitions of strategy by many authors was emphasized on the planning theme as an important component. Alfred Chandler has defined strategy as “the determination of the basic long-term goals and objectives of a enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals”. The main idea in Chandler’s definition is that strategy involves a rational planning process. The organization is depicted as choosing its goals, identifying courses of action (or strategy) that best enable it to achieve its goals, and allocating resources accordingly. Similarly, Quinn defined strategy as “the pattern or plan that integrates an organization’s major goals, policies and action sequences into a cohesive whole”. Finally, Glueck defined strategy as “a unified, comprehensive, and integrated plan designed to ensure that the basic objectives of the enterprise are achieved.” (Hill / Jones, 1989) However, definitions of strategy based on planning have been criticised. Hill and Jones indicated a new approach based on Henry Mintzberg’s definition of strategy as “a pattern in a stream of decisions or actions” (Hill / Jones, 1989), the pattern being a product of whatever intended (planned) strategies are actually realized and of any emergent (unplanned) strategies. Mintzberg’s concept of strategy suggests that strategy involves more than just planning a course of action. In the decades of 1980s and 1990s, “strategy” becomes more and more essencial in business domain. Thereby, the concept of strategy has received a great attention by various authors. By 1991, Hax and Majluf pointed out that strategy can be seen as a multidimensional concept that involves all of the critical activities of the firm, providing it with a sense of unity, direction, and purpose, as well as facilitating the necessary change caused by its environment. (Glueck / Janch, 1986) In 1993, Johnson and Schole have stated the nature of corporate strategy by the characteristics usually associated with the word “strategy” or “strategy decision”. In summary, according to them, strategy is a unified, comprehensive, and integrated plan that relates the strategic advantages of the firm to the challenges of the environment and that is designed to ensure that the basic objectives of the enterprise are achieved through proper execution by the organization. (Glueck / Janch, 1986) The concept of strategy has become one of the everyday words of managers during the past twenty years, and the practice of strategic planning is now widespread among large and medium-sized companies. This interest in strategy was caused by growing realization that the company’s environment has become progressively changeable and discontinuous from the past and that, as a result, objectives alone are insufficient as decisions rules for guiding the company’s strategic reorientation as it adapts to changing challenges, threats and opportunities. Applying corporate strategy concept to Vietnamese business conditions now is extremely important in order to enhance the building up of a strategic vision for the managers who are operating all the domestic companies, especially for manager of state companies. Business environment in Vietnam now is likely different from that of the previous planned-economy where all of the resources and the output were set up by central government and where the predetermined yearly plan was merely a subjective compulsory without any environment considerations. Actually, the managers today are faced with the uncertainty and the fast change of the business environment as well as with the competitive forces surrounding their companies. 2.1.2. Process of strategic management Strategic management is a stream of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives. The strategic management process is the way in which strategists determine objectives and make strategic decisions. However, strategic management is not simply the management of the process of strategic decision making. According to Chakrvarthy (1986), strategic management is the process through which managers ensure the long-term adaptation of their firm to its environment. It should be also emphasized that strategic management process is continuous - it never really stops within the organization. Certo and Peter (1990) defined strategic management as “a continuous, integrative process aimed at keeping an organization as a whole appropriately matched to its environment”. The process of strategic management involves 3 basic stages: (1) strategy formulation, (2) strategy implementation, and (3) evaluation and control. Different stages of the strategic management process at business level are visualized by the Strategic Management Model in Figure 2.1. Task Environment Societal Environment Figure 2.1 Strategic Management Model Based on the context of this study, the focus will be on the strategy formulation process. Strategy formulation is often referred to as strategic planning or long-range planning. Regardless of the term used, the process is primarily analytical, not action-oriented. As shown in the Strategic Management Model, the formulation process is concerned with developing a corporation’s mission, objectives, strategy, and policies. In order to do this, corporate strategy makers must scan both the external and internal environments for needed information on strategic factors. The first six steps commonly found in strategy formulation are a series of interrelated activities: 1. Evaluation of a. the corporation’s current performance results in terms of return on investment, profitability, etc., and b. the corporation’s current mission, objectives, strategies, and policies. 2. Examination and evaluation of the corporation’s strategic managers - board of directors and top management. 3. Scanning of the external environment to locate strategic opportunities and threats. External Environment Internal Environment Structure Culture Resources Strategy Formulation Objectives Strategy Strategy Implementation Programs Budgets Decisions Actions Evaluation & Control Performance Mission 4. Scanning of the internal corporate environment to determine strategic strengths and weaknesses. 5. Analysis of the strategic factors from step 3 and 4 to a. pinpoint problem areas, and b. review and revise the corporate mission and objectives as necessary. 6. Generation, evaluation, and selection of the best alternative strategy appropriate to the analysis conducted in step 5. (Source: Wheelen / Hunger, 1988) The above strategy formulation process can be divided into 2 substages, as illustrated in Figure 2.2: • The first substage is the situation analysis. Beginning with an evaluation of current performance and ending with the review and possible revision of mission and objectives, this substage includes step 1 through 5. • The second substage is the process of generation, evaluation, and selection of the best alternative strategy. This substage is step 6. In order to construct an appropriate competitive strategy, a “picture” of the competitive environment is always a useful basic. In other words, there is clearly a need for competitive environment analysis, an industry structure analysis. 2.2. Structural analysis of the competitive environment Competitive environment analysis or Industry analysis is an important skill related to the environmental scanning step in the strategic management process. Periodically, managers need to develop a formal comprehensive analysis - a strategic industry analysis. The analysis includes an overview of strategic forces affecting a target industry, an analysis of various companies in the industry, forecasts and recommendations. A formal strategic industry analysis is useful in management and planning positions. It helps managers understand their company’ s current strategic position. Specifically, it should define the scope and direction of competitor actions so that the company could focus and target. It should pinpoint and analyze the general threats and opportunities facing all the companies in an industry. This can provide an advantage for managers to respond appropriately, to catch timely the available opportunities while minimizing or avoiding the threats facing firms in the industry. The strategic industry analysis aids managers in deciding whether to enter or leave a particular industry. Finally, it aids managers in understanding the strategies and behavior of specific competitors. A useful guide for strategic industry analysis is provided by Porter. He created a model, calling it the five forces model of competition, as a strategic management technique for established profit-seeking companies, as shown in Figure 2.3. This is essentially a structural method of examining an organization or industry in order to provide a clear understanding of the factors that affect a business. Porter argues that “competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry” (Porter, 1980). He further suggests that to compete effectively a company should strive to find a position where it is best able to defend itself against these competitive forces or can influence them in its favour. So, the task of the strategist is to determine which of these forces are of greatest importance to the organization and which can be influenced by the strategic decisions of management. Each of these forces is now considered in greater detail. 1. The Threat of Entry New entrants to an industry tend to make it more competitive. The additional competitiveness may be due to a number of factors including: the additional capacity which they bring with them, their attempts to build market share, or increased costs due to the building up of the costs of the factors of production. However, the effects of new entrants materialize, it is frequently in the interests of existing competitors to deter potential new entrants by making their prospects look as unattractive as possible. This can be done in two major ways - through the erection of barriers to entry and or through the threat of severe retaliation. Clearly, it is in the interests of existing firms to have as high entry barriers as possible. Porter (McNamee, 1987) lists major barriers to entry which are: • Economies of scale • Product differentiation • Capital requirements • Switching costs • Access to distribution channel • Cost disadvantages independent of scale, for example: proprietary knowledge, etc. • Government policy. [...]... role in the national economy such as investment in the production of raw materials and chemicals Presently, private enterprises contribute 50% of the productivity of the whole country This is expected to increase to 65% by 2000 and 80% by 2005 • To improve the quality of plastic products to meet the demand of high quality consumer products of the country, then to increase the quantity and expand varieties... output of the whole country after the year of 2000 is projected as follows: (see figures 3.7 and 3.8, the current and expected structure of product on region) The South The North The Central 60% 30% 10% • The majority of medium and small size enterprises concentrate mainly on plastic processing This sector of the industry has good potential to further develop with private and joint stock enterprises The. .. unstable profit Low Low and stable profit Low and unstable profit ENTRY BARRIERS Table 2.1 The impact of entry and exit barriers over industry profitability (Hax / Majluf, 1991) In conclusion, it is in the context of the above five dimensional competitive environment that strategic decisions should be made The context for each firm and industry tends to be different and therefore the types of strategic... regards to the plastic industry, the investment environment is now more favourable and attractive to both domestic and foreign investors The legal system is now much refined, procedures are simplified, the level of knowledge of the management organizations and officers in charge of investment are now improved The consolidation of the former SCCI and SPC into one Ministry, which is now the Ministry of Planning... Vietnam 5% of the total components in the first year of operations, and this ratio shall be raise to 30% by the end of the tenth year of operations As the technical level of Vietnam’s engineering sector is still rather backward as compared with that in neighbouring countries, the trend of investing in the manufacturing of plastic components for auto and motorcycle industries as encouraged by the Vietnamese... Powerful suppliers can have the same adverse effects upon profitability as powerful buyers The big difference is the sources of their power - it is really the opposite of the sources of buyer power Thus suppliers tend to be powerful when the following conditions obtain: • • • • • • There are few of them There are few substitutes The industry supplied is not an important customer The suppliers’ product is... of 1992; the output of raw materials is 12.17 million tons, marking a 3.3% decrease from 1992 The reasons of this recession are that the demands for plastic materials of the other industries such as car, electronic industry, etc have considerably decreased and the markets for export have been shortened In addition, according to the Japan Plastic Association the reason of the continuous decline in the. .. play in the overall development of VN’s manufacturing sector and the national economic growth • Vietnam has potential of labour and market for the development of its plastic industry Weaknesses The three main points of the plastic industry are Mould, Technology, and Source of raw materials On these three aspects the Vietnam plastic industry has still a lot of disadvantages to overcome • Equipment and machinery... considered as a peaceful and stable politic environment Implementing the “renovation and open door policy”, Vietnam has expanded and consolidated its political and economic relations with many countries in the world Along with this, the lifting up of US embargo in 1994 and the participation of Vietnam in ASEAN in the last year have improved the restoration and development the economy in Vietnam to... for 35% of the turnover in 1993 Electrical and electronic devices get the second position, accounted for 25 % Household plasticwares and building materials, each kind accounts for 10% In the future, packages still plays the important role, but the demand for plastic products of the constructions and other industries such as electricity, electronics and car will raise quickly The reasons are: • The Government . strategy for the company in the long-term. The depth of this study depends partly on the availability of the key data of the Vietnamese economy and the Plastic. Organization of the study The study is organized as follows: Chapter 1 provides an introduction including the rationale of the study, the identification of the