The concept of strategic management is increasingly being adopted by companies across the globe.
As competition intensify, firms look for the most effective management strategies or models in
order to improve their competitiveness.
Strategic management can be defined as “a goals-oriented management in which the mission and
planned achievements of an organization are clearly set and all management processes are
designed and monitored towards reaching the organization’s overall goals” (Joyce and Woods,
2001, p. 12).
It is concerned with the planned and emergent initiatives that mangers take regarding resource
allocation and improving the performance of the firm. Such initiatives entail formulating the firm’s
mission, vision and objectives as well as formulating policies that help in achieving the objectives.
There are several different frameworks used to analyze the strategies implemented by different
organizations. However, the most popularly used framework is the one designed by Michael Porter,
in which he has divided the generic strategies into three broad categories: low-cost producer, niche
supplier, or differentiation strategy (Porter, 1980). Almost all the businesses can be divided into
these three categories. Michel Porter developed several analysis and management tools which
include Porter’s five forces analysis, value chain analysis, competitive advantage theory, strategic
group analysis and generic strategies (Joyce and Woods, 2001, p. 21). These tools are normally
applied to specific management functions. The significance of these tools in the process of strategic
management can be explained as follows.
Value Chain Analysis
A value chain refers to the various activities that a firm perform in order to produce the end good
or service in a given industry. At each stage “value is added to the product” (Sadler and Craig,
2003, p. 47). In order to deliver value to customers, companies must identify the point at which
value is created or lost in their processes.
Thus Michel Porter developed a model for analyzing the value chain in order to help in determining
where value is created or lost within a firm. The costs and value associated with the activities of
the firm determines whether or not products with the best value are produced by the company
(Sadler and Craig, 2003, p. 50).
The value chain framework gives managers the opportunity to identify the activities which
generate the greatest value and those that create competitive advantages. Similarly, the framework
enables managers to identify the activities that create little value for the firm and its customers.
Thus the framework enables managers to determine the activities that are important for
competitiveness as well as the achievement of the firm’s overall strategy.
The value chain is characterized by two main categories of activities namely, the primary and the
secondary activities. Primary activities are those “directly concerned with the production or
delivery of products or services” (Sadler and Craig, 2003, p. 53).
They include transportation, production, sales and marketing services. Secondary activities on the
other hand enhance the efficiency as well as effectiveness of primary processes. They include
developing human resources, procurement, acquisition of infrastructure and improving production
technology.
The firm’s strategic goals must be aligned with its value chain (Sadler and Craig, 2003, p. 53). For
example, if the company’s goal is to achieve cost efficiency, then it will focus on activities that
reduce costs. In the context of management, the value chain enables the management to evaluate
the organization’s design. By identifying the activities that add value and those that do not, the
management can make decisions on which activities to outsource or terminate and the ones to
strengthen.
Competitive Advantage
Competitive advantages refer to the unique attributes that distinguish a company from the rest and
improves its competitiveness within an industry. According to Porter, a firm should pursue policies
aimed at producing high-quality products which are then sold at high prices (Dess, 2010, p. 67).
Competitive advantage is attained when the firm develops attributes which enable it to outperform
its rivals. Thus achieving competitive advantage implies the ability to realize high performance
through attributes and resources. In the context of management, achieving competitive advantage
involves successful implementation of strategic goals.
Strategic management aimed at improving the competitive advantage of a firm should thus involve
activities which enhance access to raw materials, talented personnel and new technologies (Dess,
2010, p. 68). Strategic Group
Strategic group analysis is a strategic management concept used to group together firms with
similar strategies or business models within an industry (Dess, 2010, p. 77). The number and
characteristics of groups in a given industry is determined by the attributes used to categorize them.
However, companies normally fall into two broad categories namely, direct and indirect
competitors. Michael Porter “explained the concept of strategic group in terms of mobility
barriers” (Dess, 2010, p. 77). The mobility barriers in this case represent the entry barriers which
prevent potential competitors from entering the industry.
The significance of strategic group analysis in management includes the following. It enables the
management to identify who their rivals are, their strength within the industry and the strategy
behind their competitiveness. Thus the management will be able to formulate policies that enable
the firm to comfortably compete with its rivals (Dess, 2010, p. 78).
Strategic group analysis also helps the management to determine the likelihood of firms moving
from one strategic group to another. By knowing the characteristics of firms within a given
strategic group, the management will be able to identify opportunities which they can take
advantage of within the industry.
Finally, it enables the firm to identify strategic problems that it faces. Consequently, it gives the
management an opportunity to take timely precautionary measures in order to maintain or improve
its competitiveness.
Generic Strategies
The relative position occupied by a firm within an industry determines whether its profitability
will be above or below the average profitability levels of the industry. Sustainable competitive
advantage is the main determinant of a firm’s ability to realize above average profits in the longrun.
The two main competitive advantages that a company can posses include, low cost and
differentiation. When these two types of competitive advantages are aligned with activities for
which the company intends to realize them; three generic strategies for achieving above average
profitability are formed. The three generic strategies include “cost leadership, differentiation and
focus strategy” (Sadler and Craig, 2003, p. 63).
A firm pursuing a cost leadership strategy focuses on being the lowest cost producer in the industry
it operates in. The sources of cost advantage are influenced by the industry’s structure. The sources
include economies of scale, access to superior production technology and access to raw materials.
In order to achieve cost leadership a firm must explore all avenues of realizing cost advantages
(Porter, 1996, pp. 61-78). Achieving cost leadership will enable the firm to realize profits which
are higher than the industry average as long as its prices are comparable to the average prices in
the industry.
A firm pursing the differentiation strategy aims at being unique within its industry. The firm’s
uniqueness is normally built along the dimensions that customers highly value such as superior
product quality.
In order to achieve this objective, the firm identifies one or more elements that majority of
customers perceive as important (Porter, 1996, pp. 61-78). It then aims at meeting those needs by
uniquely positioning itself. The company will be able to charge premium prices if it maintains its
unique status in the industry.
According to Porter, a firm pursuing the focus strategy usually identifies a particular segment of
the market and concentrates in serving it. Thus the firm’s strategy will be tailored towards serving
a particular market while excluding others.