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Strategy:
Concepts and Cases
Module Director:
Dr. Majd Sakkour
PhD in Strategic Management (England)
MPhil in Strategic Management (England)
MSc in International Management (England)
MBA (Syria)
Dip in International Projects (Italy)
Dip BA (Syria)
Damascus 2018
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Module Contents
Chapter 1: Introducing Strategy Module ……….…………. 3
Chapter 2: Understanding Strategy …………….…….….... 11
Chapter 3: The Strategic Management Process …..……… 18
Chapter 4: External Analysis …………….…………..……. 32
Chapter 5: Internal Analysis ………………………………. 49
Chapter 6: Understanding Business Strategy “Part One”…68
Chapter 7: Understanding Business Strategy “Part Two”. 83
Chapter 8: Empirical Cases ……….………………….…..... 95
Chapter 9: Understanding Corporate Strategy ………… 103
Chapter 10: Strategy Evaluation …………………………. 118
Chapter 11: Globalization Strategies …………………...... 129
Chapter 12: Society and Businesses ……………………… 144
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Chapter 1:
Introducing Strategy Module
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1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
Introduction
Module Aims
Learning Outcomes
Indicative Syllabus content
Teaching and Learning Methods
Assessment Methods and Weightings
Assessment Principles
Instructions
Full Module Title Strategy: Concepts and Cases
Module Code
MBAP_ST_S18/2018
Module Level
Master
Department
Business Administration
Length
One semester
Module Director
Host Course
Dr. Majd Sakkour
(Email:t_msakkour@svuonline.org)
(majdsakor@yahoo.com)
SVU-MBA
Site
Damascus, Syria.
1.1 Introduction
This module concentrates on strategy and the strategic management process. Building on the
material presented in the core modules, this module integrates relevant theories and concepts and
presents students with the models and frameworks required to develop competitive strategies
capable of delivering business success in the global economy. Variety of strategy topics covered
such as introducing strategy concepts, mission and objectives, strategic analyses of the internal
and external environment, identifying attractive business opportunities, direction and method of
strategic options, strategic evaluation and implementation.
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1.2 MODULE AIMS
This module aims to:
1. Develop a critical understanding of the major issues of strategy and problems associated with
developing competitive strategies within the local and international environment.
2. Equip students with the tools and mental discipline to analyse complex business situations and
craft appropriate strategies capable of delivering business success.
3. Enable participants to develop a clearly articulated and practical strategy as a means to ensure a
successful sustainable social organisation.
1.3 LEARNING OUTCOMES
On successful completion of this module the student will be able to:
i. Knowledge and Understanding
1. Demonstrate his/her understanding of strategic principles by reference to relevant current
business practice
2. Show a critical awareness of the nature of the changing business environment
3. Describe the nature and relevance of business strategy with respect to attaining and
sustaining competitive advantage
4. Identify the main stages in the strategic development and implementation process
5. Apply the knowledge of strategic principles acquired in this module to his/her study of
other modules
ii. Skills
By the end of the module students should have developed skills in:
1. Communication and literacy: assignment, exam and seminars will deploy range of
communication skills. e.g. report writing.
2. Independent Learning and Working: assignment will require student to carry out indepth research on an organisation.
3. Information and Communication Technology: use of Internet to conduct research,
limited use of spreadsheets.
4.
Specific vocational skills: The module introduces students to the realities of
determining policy within organisations.
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1.4 INDICATIVE SYLLABUS CONTENT
Lecture
Lecture Topic
Lecture Contents
Number
Chapter
1
Type
Introducing the
Strategy Module
Chapter
Understanding
2
Strategy
Chapter
The Strategic
3
Management
Process
Chapter
Lecture
External Analysis
4
1.1 Introduction
1.2 Module Aims
1.3 Learning Outcomes
1.4 Indicative Syllabus content
1.5 Assessment Criteria
1.6 Teaching and Learning Methods
1.7 Assessment Methods and
Weightings
1.8 Instructions
2.1 What is strategy?
2.2 Levels of Strategy
2.3 Schools of Strategy
2.4 Goals, objectives and
Mission Statements
3.1 The Major Elements of the
Lecture
Lecture
Lecture
Strategic Management Process
3.2 Identification of
Stakeholders
3.3 Decision Making Process
3.4 Strategic Leadership
4.1 PESTEL Analysis
4.2 Porter’s 5 Forces model
4.3 Porter’s Diamond
4.4 Michael Porter's key books
Lecture
5.1 Firm’s Resources and
Chapter
5
Internal Analysis
Capabilities
5.2 SWOT Analysis
5.3 Value Chain Analysis
5.4 Case Studies
5.5 Benchmarking
5
Lecture
and Mini
Cases
Studies
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Understanding
Chapter
Business-Level
6
Strategy
(Part One)
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6.1 Introducing Business
strategy
6.2 Generic business strategies
6.3 Critical Success Factor
6.4 Core Competency
Lecture
7.1 Industry Life Cycle
Chapter
Understanding
7.2 The Growth-Share Matrix and
Lecture
Portfolio Analysis (the BCG Matrix)
7
Business-Level
Strategy
(Part Two)
7.3 The Product/Market Expansion
With Mini
Cases
Grid
( The Ansoff Matrix)
7.4 References for Further
Reading
Chapter
8
Empirical Cases
1.1 Mini-Cases about industry
life cycle
8.2 How to Use The GrowthShare Matrix and Portfolio
Analysis (the BCG Matrix)
8.3 How to Use the Product/Market
Expansion Grid ( the Ansoff Matrix)
8.4 Case Study: Experian “Entering
Case
Studies
a new market with a new product”
Chapter
9
9.1 What is Corporate Strategy
9.2 Strategic Group
Understanding 9.3 Vertical Integration
Corporate Strategy 9.4 Vertical Expansion
9.5 Related Diversification or
Unrelated Diversification
9.6 Strategic Alliances
Lecture
10.1 Introduction?
Chapter
Evaluating
10
Strategy
10.2 The Process of Strategy
Evaluation
10.3 Evaluation Approaches,
Purposes, Methods and Designs
10.4 Strategy Evaluation Criteria
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Lecture
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10.5 An Evaluation Case
11.1 Introduction
Chapter
11
Globalization
Strategies
11.2 What Is Different about
Lecture
International Marketing
11.3 Objectives of Market Entry
11.4 Modes of Market Entry
Chapter
12
Society and
Businesses
12.1 The impact of business
activity on society
12.2 Corporate Governance
12.3 Social Responsibility
12.4 Business Ethics
Lecture
References for Further Reading
1.5 TEACHING AND LEARNING METHODS
1. The module will be delivered through lectures, case studies, class debates and discussions.
2. Class participation is critical to learning and demonstrating proficiency in strategic
management. Therefore, students are expected to contribute to class discussion by sharing their
viewpoint, comments and questions. Active student involvement in the learning process is an
integral and essential part of the teaching pedagogy.
3. The case method will be used extensively in the course. Students are expected to prepare the
case by reading, answering the study questions and researching additional sources such as the
annual report, and companies’ websites. More importantly, students are required to evaluate
company strategies and provide options and recommendations.
1.6 ASSESSMENT METHODS AND WEIGHTINGS
There will be three assessments with the following aims:
Assessment 1: assignment 40% of grade- MAX: 4 students (Assignment/Standard: 1000
words).
A group assignment based on a “real-time” business strategy cases and designed to assess
the students’ ability to analyse a complex, volatile business environment and to craft
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strategies to successfully respond to both the environment and the actions of competitors
using the finite resources of their “company”.
Assessment 2: Final Exam - 60% of grade.
It will test students’ knowledge and their ability to generate, synthesise and evaluate
strategies and to critically appraise the actions of companies.
1.7 ASSESSMENT PRINICPLES
Students will be assessed on:
1. Their depth of knowledge and systematic, theoretically informed, understanding of complex
strategic issues affecting organisations and their competitors, using appropriate theoretical
frameworks.
2. Their capacity to apply this knowledge and understanding to the critical analysis of problems
and to select appropriate strategies.
3. Their ability to write clearly, economically and persuasively in presenting the background to
and nature of a problem, the alternative explanations of and perspectives on that problem, the
evaluation of alternative solutions and the articulation of a preferred solution and its implications.
1.8 INSTRUCTIONS
1. Outcome Assessment Rational:
Outcome assessment is continuous and formative. It occurs through weekly presentations by
periodical written reports and group discussion; giving students the opportunity to demonstrate
the extent to which they have developed a critical, theoretically-informed understanding of the
subject matter; through students’ participation and performance in the strategic marketing
simulation; and through their individual critical review of their performance. A final case study
analysis is the basis of a more formative assessment whilst still providing a further opportunity to
reinforce the learning that has already taken place.
2. Linkage
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Students will have attained very good strategy and business skills, the ability to assess the impact
of the business environment, strategic options and their implementation. It should also give them
a very good understanding of their role in the overall business issues, a valuable asset as they
hopefully progress through the various levels of management in their careers.
3. Electronic Resources
Students are expected to carry out a lot of background reading and require appropriate library
skills to source relevant books and specialized electronic journals. For example:
www.sciencedirect.com, www.jstor.com, www.businessweek.com
4. Strategy Reading Source
1. Lectures’ note and handouts
2. Further reading for greater depth:
The following items are recommended as the most valuable in current scholarship:
De Wit, B., Meyer, R, 2004, Strategy: Process, Content, Context: An International Perspective,
Third Edition, Thomson Learning: London.
Finaly, P., 2000, Strategic Management: An Introduction to Business and Corporate Strategy, FT
Prentice Hall: London
Johnson, G., Scholes, K., 2002, Exploring Corporate Strategy: Text and Cases” Sixth Edition: FT
Prentice Hall, London.
Mintzberg, H., 1994, The Rise and Fall of Strategic Planning, Prentice Hall: London.
Goold, M., Campbell, A., Alexander, M, 1994, Corporate-Level Strategy, John Wiley: London.
Porter, M., 1980, Competitive Strategy, Free Press: New York.
Porter, M., 1985, Competitive Advantage, Free Press: New York.
Porter, M., 1998, On Competition, Harvard Business School Press: Boston.
Web references, journals and other:
Learners are encouraged to scan in journals for good-quality articles relevant to their post-module
assignment. For example:
- Strategic Management Journal
- British Journal of Management
- Sloan Management Review
- Long Range Planning
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Chapter 2:
Understanding Strategy
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2.1 What is strategy?
2.2 Levels of Strategy
2.3 Schools of Strategy
2.4 Objectives, Vision and Mission
Statements
2.5 Experiential Exercise
As the business environment becomes more complex, strategic management is gaining in
importance. Few words are as commonly used in management as strategy1. In simple terms,
strategy means looking at the long-term future to determine what the company wants to become,
and putting in place a plan, how to get there. Strategy acts as some kind of a guidepost for a
company's ongoing evolution. Strategy provides a direction for the company and indicates what
must be done to survive, grow and be profitable.
2.1 What is Strategy?
The term strategic is widely used but often in the wrong context. So we must understand the term
carefully. We can call an issue strategic if it requires top management involvement, involves
major resource commitments, has a long term impact or has organization wide implications. In it
There are a number of names or terms for a ‘strategy’, which are usually interchangeable, such as: Corporate
Strategy, Strategic Management or Management Policy.
1
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is most simplified state the academic study of strategy shakes down to the three-question model of
strategy:
− Where are we now?
− Where do we want to be?
− How do we get there?
Johnson and Scholes (Exploring Corporate Strategy) define strategy as follows:
"Strategy is the direction and scope of an organisation over the long-term, which
achieves advantage for the organisation through its configuration of resources within a
challenging environment, to meet the needs of markets and to fulfil stakeholder
expectations".
In other words, strategy is about:
* Where is the business trying to get to in the long-term?
(direction)
* Which markets should a business compete in and what kind of activities are involved
in such markets?
(markets, scope)
* How can the business perform better than the competition in those markets?
(advantage)
* What resources (skills, assets, finance, technical competence, and facilities) are
required in order to be able to compete?
(resources)
* What external, environmental factors affect the businesses' ability to compete?
(environment)
* What are the values and expectations of those who have power in and around the
business?
(stakeholders)
It is worth remembering that strategy owes much of its early development to military operations
and war2. Consider the plans drawn up to win battles, how troops and resources are planned to be
deployed, the role of intelligence in finding out about enemy activity, the timing of operations.
2
The word strategy has been historically associated with military concepts. This term derives from the
Greek word strategia, which meant ‘generalship’ formed from stratos meaning ’army’ and ga, ‘to lead’
(Evered, 1983). Cummings (1993) explains that the emergence of the term strategy was the result of the
evolution of warfare from a simple to a complex activity, where success no longer depended on the heroic
deeds of individuals, but rather on the coordination of many units of men fighting in close formation.
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Strategy is both art and science. Strategy is an art because it requires creativity, intuitive thinking,
and ability to visualize the future, and to inspire and engage those who will implement the
strategy. Strategy is science because it requires analytical skills, the ability to collect and analyze
information and take well informed decisions.
2.2 Levels of Strategy
Strategies exist at several levels in any organisation - ranging from the overall business (or group
of businesses) through to individuals working in it. The following figure illustrates strategy levels.
Organiza
tion A
Network-Level
Organiza
tion B
Corporate
Strategy
CorporateLevel
BusinessLevel
Organiza
tion C
Unit A
Business
Strategy
Unit B
Business
Strategy
Unit C
Business
Strategy
FunctionalLevel
Finance
Strategy
Manufacturing
Strategy
Marketing
Strategy
1. Network-Level Strategy: This applies when various organizations work together
to create an economic entity. De Wit and Meyer (2004) deem that it is necessary
sometimes to align business and/or corporate level strategies to shape an internally
consistent network level strategy. A group of two or more organizations, forming a
network, could develop a strategy that fits with the demands in the relevant
environment.
2. Corporate Strategy - is concerned with the overall purpose and scope of the
business to meet stakeholder expectations. This is a crucial level since it is heavily
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influenced by investors in the business and acts to guide strategic decision-making
throughout the business.
3. Business Unit Strategy - is concerned more with how a business competes
successfully in a particular market. It concerns strategic decisions about choice of
products, meeting needs of customers, gaining advantage over competitors,
exploiting or creating new opportunities etc.
4. Operational Strategy - is concerned with how each part of the business is
organised to deliver the corporate and business-unit level strategic direction.
Operational strategy therefore focuses on issues of resources, processes, people
etc.
2.3 The Schools of strategy
The body of knowledge on strategy has evolved over time. With different schools of thought
looking at strategy in different ways, it is a good idea to review all of them briefly so that we get
an integrated picture. According to Henry Mintzerg3, there are ten different schools of strategy:
1) The Design School: Aims at creating a fit between internal strengths and weaknesses and
external threats and opportunities.
2) The Planning School: Views strategy as an intellectual, formal exercise, involving various
techniques.
3) The Positioning School: The company selects its strategic position after thoroughly
analyzing the industry. Effectively, planners become analysts.
4) Entrepreneurial School: The focus here shifts to the chief executive who largely relies on
intuition to formulate strategy. The emphasis is less on precise designs, plans or positions
and more on broad visions and perspectives.
5) Cognitive School: The focus here is on cognition and cognitive biases.
6) Learning School: Strategies are emergent, not deliberate. They evolve as the organization
learns.
7) Power School: Strategy making is rooted in power. At a micro level, people are involved
in bargaining, persuasion and confrontation. At a macro level, the organization uses its
For further reading see: “Strategy Safari: A Guided Tour Through The Wilds of Strategic Management” by Henry
Mintzberg, Joseph Lampel, and Bruce Ahlstrand, Free Press, 2005.
3
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power over others and among its partners in alliances, joint ventures and other network
relationships to negotiate things in its favour.
8) Cultural School: Views strategy formulation as a process rooted in culture. Culture shot
into prominence after the Japanese style of management became widely written about in
the 1980s.
9) Environment School: The focus here is on coping with the environment.
10) Configuration School: This school views the organization as a configuration and
integrates the claims of other schools. A variation of this somewhat academic perspective
is a more practitioner oriented view which focuses on how an organization moves from
one state to another, such as from start up to maturity.
Clearly, the approaches mentioned above, need not be viewed as exclusive, watertight
compartments. They can be combined in appropriate ways.
2.4 Objectives, Vision and Mission Statements
In general, strategic plans contain the following components:
A. Objectives:
Objectives are concrete goals that the organization seeks to reach, for example, an earnings
growth target. The objectives should be challenging but achievable. They also should be
measurable in key result areas such as market share, customer loyalty, quality, service, innovation
and human capital, so that the company can monitor its progress and make corrections as needed.
The following table presents examples for financial and non-financial objectives.
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B. Vision:
Vision Statement – What do we want to become?
Vision is a short and inspiring statement of what the organization intends to become and to
achieve at some point in the future, often stated in competitive terms. It describes aspirations for
the future, without specifying the means that will be used to achieve those desired ends.
One of the most famous examples of a vision is from Disneyland:
“To be the happiest place on earth.”
Other examples are:
“Restoring patients to full life.” (Medtronic)
“We want to satisfy all of our customers’ financial needs and help them succeed
financially.”
(Wells Fargo)
“Our vision is to be the world’s best quick service restaurant.” (McDonald’s)
C. Mission:
Mission Statement –What is our business?
A company's mission is its reason for being. The mission often is expressed in the form of a
mission statement, which conveys a sense of purpose to employees and projects a company image
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to customers. In the strategy formulation process, the mission statement sets the mood of where
the company should go.
“Nokia Mission: Connecting is about helping people feel close to what matters.
Wherever, whenever, Nokia believes in communicating, sharing, and in the
awesome potential in connecting the 2 billion who do with the 4 billion who don’t.”
“Kingston University: To promote participation in higher education, which it
regards as a democratic entitlement; to strive for excellence in learning, teaching, and
research; to realise the creative potential and fire the imagination of all its members;
and to equip its students to make effective contributions to society and the economy.”
The following table shows WellPoint Health Network’s Vision and Mission
2.5 Experiential Exercise
Using the Internet, Company’s records, Library sources, select two organizations- one in the
private sector and one in the public sector. Compare the selected companies in the following
terms:
1. Vision statement,
2. Mission statement,
3. Identifying their stakeholders.
Analyse and compare the previous information with deep analysis.
Chapter 3:Strategic
Management Process
3.1 The Major Elements of the Strategic
Management Process
3.2 Identification of Stakeholders
3.3 Decision Making Process
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3.4 Strategic Leadership
3.1 The Major Elements of the Strategic Management Process
The strategic management process is mainly made up of the following elements: Situation
analysis, strategic direction, strategy formulation, strategy implementation, and strategy
evaluation. Existing businesses that have already developed a strategic management plan will
revisit these steps as the need arises, in order to make necessary changes and improvements. The
building blocks for a comprehensive strategic management model are shown in the following
figure.
Environmental
Analysis
Strategic
Direction
Strategy
Evaluation
Strategy
Formulation
Strategy
Implementation
1. Environmental Analysis
Situation analysis is the first step in the strategic management process. Situation analysis involves
"scanning and evaluating the organizational context, the external environment, and the
organizational environment". To begin this process, organizations should observe the internal
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company environment. This includes employee interaction with other employees, employee
interaction with management, manager interaction with other managers, and management
interaction with shareholders.
Organizations also need to analyze the external environment. This would include customers,
suppliers, creditors, and competitors. Several questions can be asked which may help analyze the
external environment. What is the relationship between the company and its customers? What is
the relationship between the company and its suppliers? Does the company have a good rapport
with its creditors? Is the company actively trying to increase the value of the business for its
shareholders? Who is the competition? What advantages do competitors have over the company?
2. Strategic Direction
The organization has a mission, or reason for being. In this component we make explicit the
strategic vision for the organization's future-an idea of where the organization is going and what it
is to accomplish.
We use the information developed in the first two components, external analysis and internal
assessment, to review the organization's mission, set goals, develop strategic vision, and
determine the most critical issues the organization must address if it is going to achieve this
vision. Mission review is the foundation and authority for taking specific actions. Goals are broad
statements of what the senior leadership wants the organization to achieve. Strategic issues are the
internal or external developments that could affect the organization's ability to achieve stated
goals.
The objective of the strategic direction component is to help ensure that the organization's vision
and goals are compatible with the organization's capabilities and complement its culture, foster
commitment and cooperation among key constituencies.
3. Strategy Formulation
Strategy formulation involves designing and developing the company strategies. Determining
company strengths aids in the formulation of strategies. Strategy formulation is generally broken
down into three organizational levels: operational, competitive, and corporate.
A. Operational strategies are short-term and are associated with the various
operational departments of the company, such as human resources, finance,
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marketing, and production. These strategies are department specific. For example,
human resource strategies would be concerned with the act of hiring and training
employees with the goal of increasing human capital.
B. Competitive strategies are those associated with methods of competing in a certain
business or industry. Knowledge of competitors is required in order to formulate a
competitive strategy. The company must learn who its competitors are and how
they operate, as well as identify the strengths and weaknesses of the competition.
With this information, the company can develop a strategy to gain a competitive
advantage over these competitors.
C. Corporate strategies are long-term and are associated with "deciding the optimal
mix of businesses and the overall direction of the organization". Operating as a
sole business or operating as a business with several divisions are both part of the
corporate strategy.
4. Strategy Implementation
Strategy implementation involves putting the strategy into practice. This includes developing
steps, methods, and procedures to execute the strategy. It also includes determining which
strategies should be implemented first. The strategies should be prioritized based on the
seriousness of underlying issues. The company should first focus on the worst problems, then
move onto the other problems once those have been addressed.
The company should consider how the strategies will be put into effect at the same time that they
are being created. For example, while developing the human resources strategy involving
employee training, things that must be considered include how the training will be delivered,
when the training will take place, and how the cost of training will be covered.
5. Strategy Evaluation
Strategy evaluation involves "examining how the strategy has been implemented as well as the
outcomes of the strategy". This includes determining whether deadlines have been met, whether
the implementation steps and processes are working correctly, and whether the expected results
have been achieved. If it is determined that deadlines are not being met, processes are not
working, or results are not in line with the actual goal, then the strategy can and should be
modified or reformulated.
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Both management and employees are involved in strategy evaluation, because each is able to
view the implemented strategy from different perspectives. An employee may recognize a
problem in a specific implementation step that management would not be able to identify.
The strategy evaluation should include challenging metrics and timetables that are achievable. If it
is impossible to achieve the metrics and timetables, then the expectations are unrealistic and the
strategy
is
certain
to
fail.
3.2 Identification of Stakeholders
Most business enterprises that employ more than a few dozen people are organized as
corporations. As such, the managers are charged with the primary task of maximizing profits and
producing a satisfactory return for the shareholders, who are the owners. In turn, the management
of the corporation is overseen by a board of directors who are supposed to look out for the
interests of those shareholders. That is, the management of the company runs the day-to-day
operations while the board of directors governs the management and protects the interests of the
firm’s shareholders. At times the board mediates and resolves conflicts when shareholders and
managers disagree. Some of the key issues that they address include takeovers and control,
executive compensation, capital structure, top management succession, board nomination, and
shareholder rights.
A corporate stakeholder is a party that affects or can be affected by the actions of the business as
a whole. A useful model for this purpose is to visualize the stakeholder environment as a set of
inner and outer circles. The inner circles stand for the most important stakeholders who have the
highest influence.
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Stakeholder groups vary both in terms of their interest in the business activities and also their
power to influence business decisions. Here is a useful summary:
Stakeholder
Main Interests
Power and influence
Shareholders
Profit growth, Share price growth, dividends
Election of directors
Banks & other
Lenders
Interest and principal to be repaid, maintain
credit rating
Can enforce loan covenants
Can withdraw banking facilities
Directors and
managers
Salary ,share options, job satisfaction, status
Make decisions, have detailed information
Employees
Salaries & wages, job security, job
satisfaction & motivation
Staff turnover, industrial action, service quality
Suppliers
Long term contracts, prompt payment, growth
of purchasing
Pricing, quality, product availability
Customers
Reliable quality, value for money, product
availability, customer service
Revenue / repeat business
Word of mouth recommendation
Community
Environment, local jobs, local impact
Indirect via local planning and opinion leaders
Government
Operate legally, tax receipts, jobs
Regulation, subsidies, taxation, planning
Stakeholder power is an important factor to consider whenever you are asked to write about the
relationship between a business and its stakeholders. In the context of strategy, what is important is the
power and influence that a stakeholder has over the business objectives.
For stakeholders to have power and influence, their desire to exert influence must be combined with their
ability to exert influence on the business. The power a stakeholder can exert will reflect the extent to
which:
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•
The stakeholder can disrupt the business’ plans
•
The stakeholder causes uncertainty in the plans
•
The business needs and relies on the stakeholder
The reality is that stakeholders do not have equality in terms of their power and influence. For example:
•
Senior managers have more influence than environmental activists
•
Banks have a considerable impact on firms facing cash flow problems but
can be ignored by a cash rich firm
•
A customer that provides 50% of a business’ revenues exerts significantly
more influence than several smaller customer accounts
•
Businesses that operate from many locations across the country will be less
relevant to the local community than a business which is the dominant
employer in a town or village
•
Governments exercise relatively little influence on many well-established and
competitive business-to-business markets. However their power is much
stronger over businesses in markets which are regulated (e.g. water, gas &
electricity) or where the public sector has a direct stake (e.g. retail banking)
•
Employees have traditionally sought to increase their power as stakeholders
by grouping together in trade unions and exercising that power through
industrial action. However, in the last two decades the level of union
membership has declined significantly as has the total time lost to industrial
action
3.3 Decision Making Process
Decision making is the study of identifying and choosing alternatives based on the values and
preferences of the decision maker. Making a decision implies that there are alternative choices to
be considered, and in such a case we want not only to identify as many of these alternatives as
possible but to choose the one that:
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(1) has the highest probability of success or effectiveness and
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(2) best fits with our goals, desires, values, and so on.
3.3.1 Some Decision Making Strategies
There are often many solutions to a given problem, and the decision maker's task is to choose one
of them. The task of choosing can be as simple or as complex as the importance of the decision
warrants, and the number and quality of alternatives can also be adjusted according to importance,
time, resources and so on. There are several strategies used for choosing. Among them are the
following:
1. Optimizing. This is the strategy of choosing the best possible solution to the problem,
discovering as many alternatives as possible and choosing the very best. How thoroughly
optimizing can be done is dependent on:
A. importance of the problem
B. time available for solving it
C. cost involved with alternative solutions
D. availability of resources, knowledge
E. personal psychology, values
Note that the collection of complete information and the consideration of all alternatives is
seldom possible for most major decisions, so that limitations must be placed on alternatives.
2. Satisficing. In this strategy, the first satisfactory alternative is chosen rather than the best
alternative. If you are very hungry, you might choose to stop at the first decent looking restaurant
in the next town rather than attempting to choose the best restaurant from among all (the
optimizing strategy). The word satisficing was coined by combining satisfactory and sufficient.
For many small decisions, the satisficing strategy is perfect.
3. Maximax. This stands for "maximize the maximums." This strategy focuses on evaluating and
then choosing the alternatives based on their maximum possible payoff. This is sometimes
described as the strategy of the optimist, because favourable outcomes and high potentials are the
areas of concern. It is a good strategy for use when risk taking is most acceptable, when the gofor-broke philosophy is reigning freely.
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4. Maximin. This stands for "maximize the minimums." In this strategy, that of the pessimist, the
worst possible outcome of each decision is considered and the decision with the highest minimum
is chosen. The Maximin orientation is good when the consequences of a failed decision are
particularly harmful or undesirable. Maximin concentrates on the salvage value of a decision, or
of the guaranteed return of the decision. It's the philosophy behind the saying, "A bird in the hand
is worth two in the bush."
Example: I could put my $10,000 in a genetic engineering company, and if it creates and
patents a new bacteria that helps plants resist frost, I could make $50,000. But I could also lose
the whole $10,000. But if I invest in a soap company, I might make only $20,000, but if the
company goes completely broke and gets liquidated, I'll still get back $7,000 of my investment,
based on its book value.
3.3.2 Decision Making Procedure
In a typical decision making situation, as you move from step to step here, you will probably find
yourself moving back and forth also. The steps towards decision making are shown in the
following Figure.
Identify the
goals/problem
Get the facts
Evaluation
Develop
alternatives
Rate each
alternative & its
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Make the
decision
1. Identify the decision to be made together with the goals it should achieve. Determine the
scope and limitations of the decision. Is the new job to be permanent or temporary or is that not
yet known (thus requiring another decision later)? Is the new package for the product to be put
into all markets or just into a test market? How might the scope of the decision be changed-that is,
what are its possible parameters?
2. Get the facts. Get as many facts, data, and information as possible about a decision within the
limits of time imposed on you and your ability to process them, but remember that virtually every
decision must be made in partial ignorance. Lack of complete information must not be allowed to
paralyze your decision. A decision based on partial knowledge is usually better than not making
the decision when a decision is really needed.
3. Develop alternatives. Make a list of all the possible choices you have, including the choice of
doing nothing. Not choosing one of the candidates or one of the building sites is in itself a
decision. Often a non decision is harmful. But sometimes the decision to do nothing is useful or at
least better than the alternatives, so it should always be consciously included in the decision
making process. Also be sure to think about not just identifying available alternatives but creating
alternatives that don't yet exist. For example, if you want to choose which market/product to
pursue, think not only of the available ones in the company catalogue, but of searching for new
markets/products and creating new opportunities.
4. Rate each alternative. This is the evaluation of the value of each alternative. Consider the
negative of each alternative (cost, consequences, problems created, time needed, etc.) and the
positive of each (money saved, time saved, added creativity or happiness to company or
employees, etc.). Remember here that the alternative that you might like best or that would in the
best of all possible worlds be an obvious choice will, however, not be functional in the real world
because of too much cost, time, or lack of acceptance by others.
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Also don't forget to include indirect factors in the rating. If you are deciding between machines X,
Y, and Z and you already have an employee who knows how to operate machine Z, that fact
should be considered. If you are choosing an investigative team to send to Japan to look at plant
sites and you have very qualified candidates A, B, and C, the fact that B is a very fast typist, a
superior photographer or has some other side benefit in addition to being a qualified team
member, should be considered.
5. Rate the risk of each alternative. In problem solving, you hunt around for a solution that best
solves a particular problem, and by such a hunt you are pretty sure that the solution will work. In
decision making, however, there is always some degree of uncertainty in any choice. If we decide
to expand into Europe, will our sales and profits really increase?
Risks can be rated as percentages, ratios, rankings, grades or in any other form that allows them to
be compared. See the section on risk evaluation for more details on risking.
6. Make the decision. Choose the path to follow, whether it includes one of the alternatives,
more than one of them (a multiple decision) or the decision to choose none. And of course, don't
forget to implement the decision and then evaluate the implementation, just as you would in a
problem solving experience.
One important item often overlooked in implementation is that when explaining the decision to
those involved in carrying it out or those who will be affected by it, do not just list the projected
benefits: frankly explain the risks and the drawbacks involved and tell why you believe the
proposed benefits outweigh the negatives. Implementers are much more willing to support
decisions when they (1) understand the risks and (2) believe that they are being treated with
honesty and like adults.
3.4 Strategic Leadership
For our purpose we will define leadership as an influence process; leadership involves the
exercise of influence on the part of the leader over the behaviour of one or more other people.
Leadership is an interactive process, the collective energy of a group, organization, or nation is
focused on the attainment of a common objective or goal. Most large-scale organizations have
three broadly defined parts: the top levels ("strategic"), the middle levels ("organizational") and
the bottom levels ("production" or action-oriented).
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Leaders at the lower levels are responsible for getting things done; they are action-oriented.
Compared with leaders at topmost levels, they have little discretion about the decisions they
make, the procedures they use, and the degree of innovation they may implement.
The mid-levels are responsible for setting near- and mid-term goals and directions, and for
developing the plans, procedures and processes used by the lower levels. (Plans, procedures, and
processes are major tools for coordinating effort, particularly in large-scale organizations with
many interdependent parts that must act in a coordinated way.) The mid-levels are also
responsible for prioritizing missions and allocating major resources to tailor capability at the
lower levels.
Top-level leaders are responsible for the strategic direction of their organization within the
context of the strategic environment. The term "strategic" implies broad scale and scope. It
requires forward vision extending over long time spans. So strategic leadership is a process
wherein those responsible for large-scale organizations set long-term directions and obtain,
through consensus building, the energetic support of key constituencies necessary for the
commitment of resources.
3.4.1 Factors of leadership
There are four major factors in leadership:
Follower
Different people require different styles of leadership. For example, a new hire requires more
supervision than an experienced employee. A person who lacks motivation requires a different
approach than one with a high degree of motivation. You must know your people! The
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fundamental starting point is having a good understanding of human nature, such as needs,
emotions, and motivation.
Leader
You must have a clear understanding of who you are, what you know, and what you can do. Also,
note that it is the followers, not the leader who determines if a leader is successful. If they do not
trust or lack confidence in their leader, then they will be uninspired. To be successful you have to
convince your followers, not yourself or your superiors, that you are worthy of being followed.
Communication
You lead through two-way communication. Much of it is nonverbal. For instance, when you "set
the example," that communicates to your people that you would not ask them to perform anything
that you would not be willing to do. What and how you communicate either builds or harms the
relationship between you and your employees.
Situation
All are different. What you do in one situation will not always work in another. You must use
your judgment to decide the best course of action and the leadership style needed for each
situation. For example, you may need to confront an employee for inappropriate behaviour, but if
the confrontation is too late or too early, too harsh or too weak, then the results may prove
ineffective.
3.4.2 Leadership Resources
What provides leader with the capacity to influence followers? In other words,
what are the sources of the leader's power over subordinates? Five distinct sources
of leader power or influence have been identified. Any particular leader may have
at his/her disposal any combination of these different sources of power.
1. Reward power refers to the leader's capacity to reward followers. To the
extent that a leader possesses and controls rewards that are valued by
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subordinates, the leader's power increase (Rewards such as praise,
recognition, and attention).
2. Coercive power refers to the capacity to coerce or punish followers. Sources
of coercive power also break down into personal and positional components.
3. Legitimate power refers to the power a leader possesses as a result of
occupying a particular position or role in the organization. Legitimate power
is clearly a function of the leader's position in the organization and is
completely independent of any of the leader's personal characteristics.
4. Expert power refers to power that a leader possesses as a result of his her
knowledge and expertise regarding the tasks to be performed by
subordinates. The possession of expert power by a leader obviously depends
upon the personal characteristics of the leader and is not determined by the
formal position that the leader occupies in the organization.
5. Referent power is dependent upon the extent to which subordinates identify
with, look up to, and wish to emulate the leader. Referent power, like expert
power, is totally dependent upon the personal characteristic of the leader and
does not depend directly upon the leader's formal organizational position.
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Chapter 4:
External Analysis
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4.1 PESTEL Analysis of the MacroEnvironment
4.2 Porter’s 5 Forces Model
4.2.1 The Five Competitive Forces
4.2.2 Use of the Information from
Five Forces Analysis
4.2.3 Limitations of the five forces
4.3 Porter’s Diamond
4.3.1 Criticisms
4.4 Task
4.5 Michael Porter's key books
4.1 PESTEL Analysis of the Macro-Environment
There are many factors in the macro-environment that will affect the decisions of
the managers of any organisation. Tax changes, new laws, trade barriers,
demographic change and government policy changes are all examples of macro
change. To help analyze these factors managers can categorise them using the
PESTEL model. This classification distinguishes between:
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•
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Political factors: These refer to government policy such as the degree of
intervention in the economy. What goods and services does a government
want to provide? To what extent does it believe in subsidising firms? What
are its priorities in terms of business support? Political decisions can impact
on many vital areas for business such as the education of the workforce, the
health of the nation and the quality of the infrastructure of the economy such
as the road and rail system.
•
Economic factors: These include interest rates, taxation changes, economic
growth, inflation and exchange rates. Economic change can have a major
impact on a firm's behaviour. For example:
- Higher interest rates may deter investment because it costs more to
borrow.
- A strong currency may make exporting more difficult because it may
raise the price in terms of foreign currency.
- Inflation may provoke higher wage demands from employees and raise
costs.
- Higher national income growth may boost demand for a firm's products.
•
Social factors: Changes in social trends can impact on the demand for a
firm's products and the availability and willingness of individuals to work. In
the UK, for example, the population has been ageing. This has increased the
costs for firms who are committed to pension payments for their employees
because their staff are living longer. It also means some firms such as Asda
have started to recruit older employees to tap into this growing labour pool.
The ageing population also has impact on demand: for example, demand for
sheltered accommodation and medicines has increased whereas demand for
toys is falling.
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•
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Technological factors: new technologies create new products and new
processes. MP3 players, computer games, online gambling and high
definition TVs are all new markets created by technological advances.
Online shopping, bar coding and computer aided design are all
improvements to the way we do business as a result of better technology.
Technology can reduce costs, improve quality and lead to innovation. These
developments can benefit consumers as well as the organisations providing
the products.
•
Environmental factors: environmental factors include the weather and
climate change. Changes in temperature can impact on many industries
including farming, tourism and insurance. With major climate changes
occurring due to global warming and with greater environmental awareness
this external factor is becoming a significant issue for firms to consider. The
growing desire to protect the environment is having an impact on many
industries such as the travel and transportation industries (for example, more
taxes being placed on air travel and the success of hybrid cars) and the
general move towards more environmentally friendly products and processes
is affecting demand patterns and creating business opportunities.
•
Legal factors: these are related to the legal environment in which firms
operate. In recent years in the UK there have been many significant legal
changes that have affected firms' behaviour. The introduction of age
discrimination and disability discrimination legislation, an increase in the
minimum wage and greater requirements for firms to recycle are examples
of relatively recent laws that affect an organisation's actions. Legal changes
can affect a firm's costs (e.g. if new systems and procedures have to be
developed) and demand (e.g. if the law affects the likelihood of customers
buying the good or using the service).
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Different categories of law include:
•
consumer laws; these are designed to protect customers against unfair
practices such as misleading descriptions of the product
•
competition laws; these are aimed at protecting small firms against bullying
by larger firms and ensuring customers are not exploited by firms with
monopoly power
•
employment laws; these cover areas such as redundancy, dismissal, working
hours and minimum wages. They aim to protect employees against the abuse
of power by managers
•
health and safety legislation; these laws are aimed at ensuring the workplace
is as safe as is reasonably practical. They cover issues such as training,
reporting accidents and the appropriate provision of safety equipment
Typical PESTEL factors to consider include:
Factor
Could include:
Political
e.g. EU enlargement, the euro, international trade, taxation policy
Economic
e.g. interest rates, exchange rates, national income, inflation,
unemployment, Stock Market
Social
e.g. ageing population, attitudes to work, income distribution
Technological
e.g. innovation, new product development, rate of technological
obsolescence
Environmental
e.g. global warming, environmental issues
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e.g. competition law, health and safety, employment law
By using the PESTEL framework we can analyse the many different factors in a
firm's macro environment. In some cases particular issues may fit in several
categories. However, it is important not to just list PESTEL factors because this
does not in itself tell managers very much. What managers need to do is to think
about which factors are most likely to change and which ones will have the greatest
impact on them i.e. each firm must identify the key factors in their own
environment. For some such as pharmaceutical companies government regulation
may be critical; for others, perhaps firms that have borrowed heavily, interest rate
changes may be a huge issue. Managers must decide on the relative importance of
various factors and one way of doing this is to rank or score the likelihood of a
change occurring and also rate the impact if it did. The higher the likelihood of a
change occurring and the greater the impact of any change the more significant this
factor will be to the firm's planning.
It is also important when using PESTEL analysis to consider the level at which it is
applied. When analysing companies such as Sony, Chrysler, Coca Cola, BP and
Disney it is important to remember that they have many different parts to their
overall business - they include many different divisions and in some cases many
different brands. Whilst it may be useful to consider the whole business when using
PESTEL in that it may highlight some important factors, managers may want to
narrow it down to a particular part of the business (e.g. a specific division of Sony);
this may be more useful because it will focus on the factors relevant to that part of
the business. They may also want to differentiate between factors which are very
local, other which are national and those which are global.
For example, a retailer undertaking PESTEL analysis in UK may consider:
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•
Local factors such as planning permission and local economic growth rates
•
National factors such as UK laws on retailer opening hours and trade
descriptions legislation and UK interest rates
•
Global factors such as the opening up of new markets making trade easier.
The entry of Bulgaria and Romania into the European Union might make it
easier to enter that market in terms of meeting the various regulations and
provide new expansion opportunities. It might also change the labour force
within the UK and recruitment opportunities.
This version of PESTEL analysis is called LONGPESTEL. The following table
provides an example of a LONGPESTEL analysis in UK:
POLITICAL
LOCAL
NATIONAL
GLOBAL
Provision of services
UK government
World trade
by local council
policy on subsidies
agreements e.g.
further expansion of
the EU
ECONOMIC
Local income
UK interest rates
Overseas economic
growth
SOCIAL
Local population
Demographic
growth
change (e.g. ageing
Migration flows
population)
TECHNOLOGICAL
Improvements in
UK wide
International
local technologies
technology e.g. UK
technological
e.g. availability of
online services
breakthroughs e.g.
Digital TV
internet
ENVIRONMENTAL
Local waste issues
UK weather
Global climate change
LEGAL
Local
UK law
International
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licences/planning
agreements on human
permission
rights or
environmental policy
4.2 Porter’s 5 Forces Model
The model of the Five Competitive Forces was developed by Michael E. Porter in
his book “Competitive Strategy: Techniques for Analyzing Industries and
Competitors“ in 1980. Since that time it has become an important tool for analyzing
an organizations industry structure in strategic processes. Porters model is based on
the insight that a corporate strategy should meet the opportunities and threats in the
organizations external environment. Especially, competitive strategy should base on
and understanding of industry structures and the way they change. Porter has
identified five competitive forces that shape every industry and every market.
These forces determine the intensity of competition and hence the profitability and
attractiveness of an industry. The objective of corporate strategy should be to
modify these competitive forces in a way that improves the position of the
organization. Porters model supports analysis of the driving forces in an industry.
Based on the information derived from the Five Forces Analysis, management can
decide how to influence or to exploit particular characteristics of their industry.
5.2.1 The Five Competitive Forces
The Five Competitive Forces are typically described as follows:
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4.2.1.1 Bargaining Power of Suppliers
The term 'suppliers' comprises all sources for inputs that are needed in order to
provide goods or services. Supplier bargaining power is likely to be high when:
1. The market is dominated by a few large suppliers rather than a
fragmented source of supply,
2.
There are no substitutes for the particular input,
3. The suppliers customers are fragmented, so their bargaining power is
low,
4. The switching costs from one supplier to another are high,
5. There is the possibility of the supplier integrating forwards in order to
obtain higher prices and margins. This threat is especially high when
6. The buying industry has a higher profitability than the supplying
industry,
7. Forward integration provides economies of scale for the supplier,
8.
The buying industry has low barriers to entry.
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In such situations, the buying industry often faces a high pressure on margins from
their suppliers. The relationship to powerful suppliers can potentially reduce
strategic options for the organization.
4.2.1.2 Bargaining Power of Customers
Similarly, the bargaining power of customers determines how much customers can
impose pressure on margins and volumes. Customers bargaining power is likely to
be high when:
1. They buy large volumes, there is a concentration of buyers.
2.
The supplying industry comprises a large number of small operators.
3. The supplying industry operates with high fixed costs.
4.
The product is undifferentiated and can be replaces by substitutes.
5.
Switching to an alternative product is relatively simple and is not related
to high costs.
6.
Customers have low margins and are price-sensitive.
7.
Customers could produce the product themselves.
8.
The product is not of strategically important for the customer.
9.
There is the possibility for the customer integrating backwards.
4.2.1.3 Threat of New Entrants
The competition in an industry will be the higher, the easier it is for other
companies to enter this industry. In such a situation, new entrants could change
major determinants of the market environment (e.g. market shares, prices, customer
loyalty) at any time. There is always a latent pressure for reaction and adjustment
for existing players in this industry.
The threat of new entries will depend on the extent to which there are barriers to
entry. These are typically
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1.
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Economies of scale (minimum size requirements for profitable
operations),
2. High initial investments and fixed costs,
3.
Brand loyalty of customers
4.
Protected intellectual property like patents, licenses etc,
5. Scarcity of important resources, e.g. qualified expert staff
6.
7.
8.
Access to raw materials is controlled by existing players,
Distribution channels are controlled by existing players,
Existing players have close customer relations, e.g. from long-term
service contracts,
9. High switching costs for customers
10.
Legislation and government action
4.2.1.4 Threat of Substitutes
A threat from substitutes exists if there are alternative products with lower prices of
better performance parameters for the same purpose. They could potentially attract
a significant proportion of market volume and hence reduce the potential sales
volume for existing players. This category also relates to complementary products.
Similarly to the threat of new entrants, the treat of substitutes is determined by
factors like:
1.
Brand loyalty of customers,
2.
Close customer relationships,
3.
Switching costs for customers,
4.
The relative price for performance of substitutes,
5.
Current trends.
4.2.1.5 Competitive Rivalry between Existing Players
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This force describes the intensity of competition between existing players
(companies) in an industry. High competitive pressure results in pressure on prices,
margins, and hence, on profitability for every single company in the industry.
Competition between existing players is likely to be high when:
1. There are many players of about the same size,
2.
Players have similar strategies
3.
There is not much differentiation between players and their
products, hence, there is much price competition
4.
Low market growth rates (growth of a particular company is
possible only at the expense of a competitor),
5.
Barriers for exit are high (e.g. expensive and highly specialized
equipment).
4.2.2 Use of the Information from Five Forces Analysis
Five Forces Analysis can provide valuable information for three aspects of
corporate planning:
A. Statistical Analysis:
The Five Forces Analysis allows determining the attractiveness of an industry. It
provides insights on profitability. Thus, it supports decisions about entry to or exit
from and industry or a market segment. Moreover, the model can be used to
compare the impact of competitive forces on the own organization with their impact
on competitors. Competitors may have different options to react to changes in
competitive forces from their different resources and competences. This may
influence the structure of the whole industry.
B. Dynamical Analysis:
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In combination with a PESTEL-Analysis, which reveals drivers for change in an
industry, Five Forces Analysis can reveal insights about the potential future
attractiveness of the industry. Expected political, economical, sociodemographical
and technological changes can influence the five competitive forces and thus have
impact on industry structures. Useful tools to determine potential changes of
competitive forces are scenarios.
C. Analysis of Options:
With the knowledge about intensity and power of competitive forces, organizations
can develop options to influence them in a way that improves their own competitive
position. The result could be a new strategic direction, e.g. a new positioning,
differentiation for competitive products of strategic partnerships.
Thus, Porters model of Five Competitive Forces allows a systematic and structured
analysis of market structure and competitive situation. The model can be applied to
particular companies, market segments, industries or regions. Therefore, it is
necessary to determine the scope of the market to be analyzed in a first step.
Following, all relevant forces for this market are identified and analyzed. Hence, it
is not necessary to analyze all elements of all competitive forces with the same
depth.
The Five Forces Model is based on microeconomics. It takes into account supply
and demand, complementary products and substitutes, the relationship between
volume of production and cost of production, and market structures like monopoly,
oligopoly or perfect competition.
4.2.3 Limitations of the Porter’s Five Forces
Porter’s model of Five Competitive Forces has been subject of much critique. Its
main weakness results from the historical context in which it was developed. In the
early eighties, cyclical growth characterized the global economy. Thus, primary
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corporate objectives consisted of profitability and survival. A major prerequisite for
achieving these objectives has been optimization of strategy in relation to the
external environment. At that time, development in most industries has been fairly
stable and predictable, compared with today’s dynamics. In general, the
meaningfulness of this model is reduced by the following factors:
The model is best applicable for analysis of simple market structures. A
comprehensive description and analysis of all five forces gets very difficult in
complex industries with multiple interrelations, product groups and segments. A too
narrow focus on particular segments of such industries, however, bears the risk of
missing important elements.
The model assumes relatively static market structures. This is hardly the case
in today’s dynamic markets. Technological breakthroughs and dynamic market
entrants from start-ups or other industries may completely change business models,
entry barriers and relationships along the supply chain within short times. The Five
Forces model may have some use for later analysis of the new situation; but it will
hardly provide much meaningful advice for preventive actions.
The model is based on the idea of competition. It assumes that companies try
to achieve competitive advantages over other players in the markets as well as over
suppliers or customers. With this focus, it dos not really take into consideration
strategies like strategic alliances, electronic linking of information systems of all
companies along a value chain, virtual enterprise-networks or others.
Overall, Porters Five Forces Model has some major limitations in today’s market
environment. It is not able to take into account new business models and the
dynamics of markets. The value of Porters model is more that it enables managers
to think about the current situation of their industry in a structured, easy-tounderstand way – as a starting point for further analysis.
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4.3 Porter’s Diamond Model
The Porter’s Diamond model (1990) stressed the determinants of national advantage
and it is based on four country-specific “determinants” and two external variables,
chance and government. Porter’s four determinants and two outside forces interact
in the “diamond” of competitive advantage, with the nature of a country’s
international competitiveness depending upon the type and quality of these
interactions. The four determinants for a nation shape the environment in which
local firm compete and promote or impede the creation of competitive conditions,”
The four determinants of Porter’s Diamond model (1990) are as follows:
1. Factor Conditions:
The nation’s factors of production, including natural resource and created
factors, such as the quantity, skills and cost of personnel; the abundance, quality,
accessibility, and cost of the nation’s physical resource; the nation’s stock of
knowledge resources; the amount and cost of capital resources that are available
in the banking and finance sector; and the type, quality, and user cost of the
nation’s infrastructure, etc,.
- In terms of lack of resources, how true is this?
i.
Switzerland was the first country to experience labour shortages. They
abandoned
labour-intensive
watches
and
concentrated
on
innovative/high-end watches.
ii.
Japan has high priced land and so its factory space is at a premium.
This lead to just-in-time inventory techniques (Japanese firms can’t
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have a lot of stock taking up space, so to cope with the potential of not
have goods around when they need it, they innovated traditional
inventory techniques).
iii.
Sweden has a short building season and high construction costs. These
two things combined created a need for pre-fabricated houses.
2. Demand Conditions:
The nature of demand for products or service at home and the degree of
sophistication of buyers, such as the compositions of demand in the home
market; the size and growth rate of demand at home; and the mechanisms
through which domestic demand is internationalized and a nation’s products and
services sells abroad, etc,..
3. Related and Supporting Industries:
The presence or absence of supplier and related industries that basically is
international competitive, such as the presence of internationally competitive
supplier industries that create advantages in downstream industries through
efficient, early, or rapid access to cost-effective inputs; and internationally
competitive related industries which can coordinate and share activities in the
value chain when competing or those which involve products that are
complementary.
4. Firm Strategy, Structure and Rivalry:
The domestic rivalry of firms and the conditions governing how companies are
created, organized and managed, such as the ways in which firms are managed
and choose to compete; the goals that companies seek to attain as well as the
motivations of their employees and managers; and the amount of domestic
rivalry and the creation and persistence of competitive advantage in the
respective industry.
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The two outside force, also affecting the competitiveness of a nation, but not direct
determinants, are these:
1. The role of chance as caused by developments such as new inventions;
political decisions by foreign government; wars; significant shift in world
financial markets or exchange rates; discontinuities in input costs such as oil
shocks; surges in world or region demand; and major technological
breakthroughs.
2. The various roles of government including subsidies; education policies;
actions toward capital markets; the establishment of local product standards
and regulations; the purchase of goods and service; tax laws; and antitrust
regulation (Porter, p.69-130)
4.3.1 Criticisms
Although Porter theory is renowned, it has a number of critics.
1. Porter developed his model based on case studies and these tend to only
apply to developed economies.
2. Porter argues that only outward-Foreign Direct Investment (FDI) is valuable
in creating competitive advantage, and inbound-FDI does not increase
domestic competition significantly because the domestic firms lack the
capability to defend their own markets and face a process of market-share
erosion and decline. However, there seems to be little empirical evidence to
support that claim.
3. The Porter model does not adequately address the role of MNCs. There
seems to be ample evidence that the diamond is influenced by factors outside
the home country.
4.4 Michael Porter's Key Books:
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For further reading, the followings are some major books written by M. Porter:
- Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980
- Competitive Advantage: Creating and Sustaining Superior Performance, 1985
- Competition in Global Industries, 1986
- The Competitive Advantage of Nations, 1990
Chapter 5:
Internal Analysis
5.1 Firm’s Resources and
Capabilities
5.2 SWOT Analysis
5.3 Value Chain Analysis
5.4 Case Studies: A- Nike
B- Wal-Mart
5. 5 Benchmarking
5.1 Firm’s Resources and Capabilities
Economics generally models firms as generic black boxes that transform inputs
into outputs in an efficient manner. Edith Penrose (1950) is generally credited with
being the first person to model firms as unique bundles of resources. Some
individuals like to make distinctions between resources, what companies have,
versus capabilities, things companies can do. A classic example might be my
personal computer. As a resource it is more powerful than the original computer on
the Space Shuttle, however, I could not land the Space Shuttle with it. So in this
case I have a superior resource but an inferior capability.
Resources and capabilities can take many different forms. Literally anything an
organization possesses can be considered a resource. Examples include financial
resources, plants, equipment, technology, reputation, brands, and organizational
expertise. In short there is no potential constraint on what can be considered a firm's
resources or capabilities.
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5.1.1 VRIO Analysis
Given that almost anything a firm possesses can be considered a resource or
capability how should you attempt to narrow down the ones that explain why firm
performance differs? In order to lead to a sustainable competitive advantage a
resource or capability should be Valuable, Rare, Inimitable (including nonsubstitutable), and Organized. This VRIO framework is the foundation for internal
analysis. If you ask a business person why their firm does well while others do
poorly, a common answer is likely to be "our people." But this is really not an
answer, it may be the start of an answer, but you need to probe deeper, what is it
about "our people" that are especially valuable? Why don't competitors have similar
people? Can't competitors hire our people away? Or is it that there something
special about the organization that brings out the best in people? These kinds of
questions form the basis of VRIO and get to the heart of why some resources help
firms more than others.
A. Valuable. A resource is valuable if it helps the organization meet an
external threat or exploit an opportunity. While it may not help the firm
outperform its competitors, it can still be labelled a strength. One good
way to think about valuable resources is to ask how they help the
company. Common competitive foundations, which indicated earlier as
the generic building blocks, for firms are efficiency, quality, customer
responsiveness, and innovation. If a resource helps bring about any one of
these four things then it is valuable.
Efficiency is simply the amount of output for any unit of input, and is
probably the most obvious way a firm can obtain an advantage. If a firm is
a more efficient producer of goods or services than its competitors then it
has an advantage. Innovation is devising new products or services (product
innovation) or new ways of producing/delivering goods or services
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(process innovation). Product innovation is of direct benefit to the
organization because an organization can have at least a temporary
monopoly on the new product. Process innovation generally influences
efficiency rather than having a direct effect.
Quality is the idea that the good does what it is designed for exceptionally
well. Customer Responsiveness is simply meeting the needs of the
customer exceptionally well. It is probably the broadest of the three
because it can encompass things like merchandise returns, hours of
availability, etc… A resource that isn't even valuable, e.g. tarnished brand
name, is best labelled a weakness.
B. Rare. A resource is rare simply if it is not widely possessed by other
competitors. Of the criteria this is probably the easiest to judge. For
example, Coke's brand name is valuable but most of Coke's competitors
(Pepsi, 7 Up, RC) also have widely recognized brand names as well,
making it not that rare. Of course, Coke’s brand may be the most
recognized, but that makes it more valuable not more rare in this case.
C. Inimitable. A resource is inimitable and non substitutable if it is difficult
for another firm to acquire it or a substitute something else in its place.
This is probably the toughest criteria to examine because given enough
time and money almost ANY resource can be imitated. Even patents only
last 17 years and can be invented around in even less time. Therefore, one
way to think about this is to compare how long you think it will take for
competitors to imitate or substitute something else for that resource and
compare it to the useful life of the product.
Another way to help determine if a resource is inimitable is why/how it
came about. Inimitable resources are often a result of historical,
ambiguous, or socially complex causes. For example, the U.S. Army paid
for Coke to build bottling plants around the world during World War II.
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This is an example of history creating an inimitable asset. Generally,
intangible (also called tacit) resources or capabilities, like corporate culture
or reputation, are very hard to imitate and therefore inimitable.
D. Organized. A resource is organized if the firm is able to actually use it.
Generally, organization is frequently neglected by strategy because it often
deals with the inner workings of firm management. The good news is that
rarely are firms not organized to exploit their valuable resources. However,
if you analysis does turn up a valuable, rare, and inimitable resource that
the firm is not taking advantage of, then this should probably be your
number one recommendation! Many scholars refer to core competencies.
A core competency is simply a resource that is VRIO. While VRIO
resources are the best, they are quite rare and it is not uncommon for
successful firms to simply be combinations of a large number of VR_O or
even V_ _ O resources and capabilities. Recall that even a V _ _ O
resource can be considered a strength under a traditional SWOT analysis.
Finally remember that VRIO analysis is done on each individual resource
not on the firm as a whole.
5.2 SWOT Analysis
Organizational strategies are the means through which companies accomplish their
missions and goals. Successful strategies address four elements of the setting within
which the company operates: (1) the company's strengths, (2) its weaknesses, (3)
the opportunities in its competitive environment, and (4) the threats in its
competitive environment. This set of four elements—strengths, weaknesses,
opportunities, and threats—when used by a firm to gain competitive advantage, is
often referred to as a SWOT analysis. SWOT was developed by Ken Andrews in
the early 1970s. An assessment of strengths and weaknesses occurs as a part of
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organizational analysis; that is, it is an audit of the company's internal workings,
which are relatively easier to control than outside factors. Conversely, examining
opportunities and threats is a part of environmental analysis—the company must
look outside of the organization to determine opportunities and threats, over which
it has lesser control.
Andrews's original conception of the strategy model that preceded the SWOT asked
four basic questions about a company and its environment:
(1) What can we do?
(2) What do we want to do?
(3) What might we do? and
(4) What do others expect us to do?
The answers to these questions provide the input for an effective strategic
management process. While Andrews' original conception of this analysis has been
developed and changed to the more streamlined SWOT analysis that we know
today, his work is the foundation of this activity.
5.2.1 Strength, Weaknesses, Opportunities, and Threats
Strengths, in the SWOT analysis, are a company's capabilities and resources that
allow it to engage in activities to generate economic value and perhaps competitive
advantage. A company's strengths may be in its ability to create unique products, to
provide high-level customer service, or to have a presence in multiple retail
markets. Strengths may also be things such as the company's culture, its staffing
and training, or the quality of its managers. Whatever capability a company has can
be regarded as strength.
A company's weaknesses are a lack of resources or capabilities that can prevent it
from generating economic value or gaining a competitive advantage if used to enact
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the company's strategy. There are many examples of organizational weaknesses.
For example, a firm may have a large, bureaucratic structure that limits its ability to
compete with smaller, more dynamic companies. Another weakness may occur if a
company has higher labor costs than a competitor who can have similar
productivity from a lower labor cost. The characteristics of an organization that can
be strength, as listed above, can also be a weakness if the company does not do
them well.
Opportunities provide the organization with a chance to improve its performance
and its competitive advantage. Some opportunities may be anticipated, others arise
unexpectedly. Opportunities may arise when there are niches for new products or
services, or when these products and services can be offered at different times and
in different locations. For instance, the increased use of the Internet has provided
numerous opportunities for companies to expand their product sales.
Threats can be an individual, group, or organization outside the company that aims
to reduce the level of the company's performance. Every company faces threats in
its environment. Often the more successful companies have stronger threats,
because there is a desire on the part of other companies to take some of that success
for their own. Threats may come from new products or services from other
companies that aim to take away a company's competitive advantage. Threats may
also come from government regulation or even consumer groups.
A strong company strategy that shows how to gain competitive advantage should
address all four elements of the SWOT analysis. It should help the organization
determine how to use its strengths to take advantage of opportunities and neutralize
threats. Finally, a strong strategy should help an organization avoid or fix its
weaknesses. If a company can develop a strategy that makes use of the information
from SWOT analysis, it is more likely to have high levels of performance.
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Nearly every company can benefit from SWOT analysis. Larger organizations may
have strategic-planning procedures in place that incorporate SWOT analysis, but
smaller firms, particularly entrepreneurial firms may have to start the analysis from
scratch. Additionally, depending on the size or the degree of diversification of the
company, it may be necessary to conduct more than one SWOT analysis. If the
company has a wide variety of products and services, particularly if it operates in
different markets, one SWOT analysis will not capture all of the relevant strengths,
weaknesses, opportunities, and threats that exist across the span of the company's
operations.
5.2.2 Limitations of SWOT Analysis
One major problem with the SWOT analysis is that while it emphasizes the
importance of the four elements associated with the organizational and
environmental analysis, it does not address how the company can identify the
elements for their own company. Many organizational executives may not be able
to determine what these elements are, and the SWOT framework provides no
guidance. For example, what if a strength identified by the company is not truly a
strength? While a company might believe its customer service is strong, they may
be unaware of problems with employees or the capabilities of other companies to
provide a higher level of customer service. Weaknesses are often easier to
determine, but typically after it is too late to create a new strategy to offset them. A
company may also have difficulty identifying opportunities. Depending on the
organization, what may seem like an opportunity to some, may appear to be a threat
to others. Opportunities may be easy to overlook or may be identified long after
they can be exploited. Similarly, a company may have difficulty anticipating
possible threats in order to effectively avoid them.
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While the SWOT framework does not provide managers with the guidance to
identify strengths, weaknesses, opportunities, and threats, it does tell managers what
questions to ask during the strategy development process, even if it does not
provide the answers. Managers know to ask and to determine a strategy that will
take advantage of a company's strengths, minimize its weaknesses, exploit
opportunities, or neutralize threats.
5.3 Value Chain Analysis
The value chain is a systematic approach to examining the development of
competitive advantage. It was created by M. E. Porter in his book, Competitive
Advantage (1980). The chain consists of a series of activities that create and build
value. They culminate in the total value delivered by an organisation. The 'margin'
depicted in the diagram is the same as added value. The organisation is split into
'primary activities' and 'support activities.'
A. Primary Activities.
1. Inbound Logistics.
Here goods are received from a company's suppliers. They are stored until they are
needed on the production/assembly line. Goods are moved around the organisation.
2. Operations.
This is where goods are manufactured or assembled. Individual operations could
include room service in an hotel, packing of books/videos/games by an online
retailer, or the final tune for a new car's engine.
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3. Outbound Logistics.
The goods are now finished, and they need to be sent along the supply chain to
wholesalers, retailers or the final consumer.
4. Marketing and Sales.
In true customer orientated fashion, at this stage the organisation prepares the
offering to meet the needs of targeted customers. This area focuses strongly upon
marketing communications and the promotions mix.
5. Service.
This includes all areas of service such as installation, after-sales service, complaints
handling, training and so on.
B. Support Activities.
1. Procurement.
This function is responsible for all purchasing of goods, services and materials. The
aim is to secure the lowest possible price for purchases of the highest possible
quality. They will be responsible for outsourcing (components or operations that
would normally be done in-house are done by other organisations), and epurchasing (using IT and web-based technologies to achieve procurement aims).
2. Technology Development.
Technology is an important source of competitive advantage. Companies need to
innovate to reduce costs and to protect and sustain competitive advantage. This
could include production technology, Internet marketing activities, lean
manufacturing, Customer Relationship Management (CRM), and many other
technological developments.
3. Human Resource Management (HRM).
Employees are an expensive and vital resource. An organisation would manage
recruitment and s election, training and development, and rewards and
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remuneration. The mission and objectives of the organisation would be driving
force behind the HRM strategy.
4. Firm Infrastructure.
This activity includes and is driven by corporate or strategic planning. It includes
the Management Information System (MIS), and other mechanisms for planning
and control such as the accounting department.
5.4 Case Studies :
A - Nike.
Strengths.
Nike is a very competitive organization. Phil Knight (Founder and CEO) is often
quoted as saying that 'Business is war without bullets.' At the Atlanta Olympics,
Reebok went to the expense of sponsoring the games. Nike did not. However Nike
sponsored the top athletes and gained valuable coverage.
Nike has no factories. It does not tie up cash in buildings and manufacturing
workers. This makes a very lean organization. Nike is strong at research and
development, as is evidenced by its evolving and innovative product range. They
then manufacture wherever they can produce high quality product at the lowest
possible price. If prices rise, and products can be made more cheaply elsewhere (to
the same or better specification), Nike will move production.
Nike is a global brand. It is the number one sports brand in the World. Its famous
'Swoosh' is instantly recognizable, and Phil Knight even has it tattooed on his ankle.
Weaknesses
The organization does have a diversified range of sports products. However, the
income of the business is still heavily dependent upon its share of the footwear
market. This may leave it vulnerable if for any reason its market share erodes.
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The retail sector is very price sensitive. Nike does have its own retailer in Nike
Town. However, most of its income is derived from selling into retailers. Retailers
tend to offer a very similar experience to the consumer. Can you tell one sports
retailer from another? So margins tend to get squeezed as retailers try to pass some
of the low price competition pressure onto Nike.
Opportunities
Product development offers Nike many opportunities. The brand is fiercely
defended by its owners whom truly believe that Nike is not a fashion brand.
However, like it or not, consumers that wear Nike product do not always buy it to
participate in sport. Some would argue that in youth culture especially, Nike is a
fashion brand. This creates its own opportunities, since product could become
unfashionable before it wears out i.e. consumers need to replace shoes.
There is also the opportunity to develop products such as sport wear, sunglasses and
jewellery. Such high value items do tend to have associated with them, high profits.
The business could also be developed internationally, building upon its strong
global brand recognition. There are many markets that have the disposable income
to spend on high value sports goods. For example, emerging markets such as China
and India have a new richer generation of consumers. There are also global
marketing events that can be utilised to support the brand such as the World Cup
(soccer) and The Olympics.
Threats
Nike is exposed to the international nature of trade. It buys and sells in different
currencies and so costs and margins are not stable over long periods of time. Such
an exposure could mean that Nike may be manufacturing and/or selling at a loss.
This is an issue that faces all global brands.
The market for sports shoes and garments is very competitive. The model
developed by Phil Knight in his Stamford Business School days (high value
branded product manufactured at a low cost) is now commonly used and to an
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extent is no longer a basis for sustainable competitive advantage. Competitors are
developing alternative brands to take away Nike's market share.
As discussed above in weaknesses, the retail sector is becoming price competitive.
This ultimately means that consumers are shopping around for a better deal. So if
one store charges a price for a pair of sports shoes, the consumer could go to the
store along the street to compare prices for the exactly the same item, and buy the
cheaper of the two. Such consumer price sensitivity is a potential external threat to
Nike.
B- Wal-Mart.
'Wal-Mart Stores, Inc. is the world's largest retailer, with $256.3 billion in sales in
the fiscal year ending Jan. 31, 2004. The company employs 1.6 million associates
worldwide through more than 3,600 facilities in the United States and more than
1,570 units . . .more? Go to Wal-Mart Facts
Strengths
• Wal-Mart is a powerful retail brand. It has a reputation for value for money,
convenience and a wide range of products all in one store.
• Wal-Mart has grown substantially over recent years, and has experienced
global expansion (for example its purchase of the United Kingdom based
retailer ASDA).
• The company has a core competence involving its use of information
technology to support its international logistics system. For example, it can
see how individual products are performing country-wide, store-by-store at a
glance. IT also supports Wal-Mart's efficient procurement.
• A focused strategy is in place for human resource management and
development. People are key to Wal-Mart's business and it invests time and
money in training people, and retaining a developing them.
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Weaknesses
• Wal-Mart is the World's largest grocery retailer and control of its empire,
despite its IT advantages, could leave it weak in some areas due to the huge
span of control.
• Since Wal-Mart sell products across many sectors (such as clothing, food, or
stationary), it may not have the flexibility of some of its more focused
competitors.
• The company is global, but has has a presence in relatively few countries
Worldwide.
Opportunities
• To take over, merge with, or form strategic alliances with other global
retailers, focusing on specific markets such as Europe or the Greater China
Region.
• The stores are currently only trade in a relatively small number of countries.
Therefore there are tremendous opportunities for future business in
expanding consumer markets, such as China and India.
• New locations and store types offer Wal-Mart opportunities to exploit market
development. They diversified from large super centres, to local and mallbased sites.
• Opportunities exist for Wal-Mart to continue with its current strategy of
large, super centres.
Threats
• Being number one means that you are the target of competition, locally and
globally.
• Being a global retailer means that you are exposed to political problems in
the countries that you operate in.
• The cost of producing many consumer products tends to have fallen because
of lower manufacturing costs. Manufacturing cost have fallen due to
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outsourcing to low-cost regions of the World. This has lead to price
competition, resulting in price deflation in some ranges. Intense price
competition is a threat.
5.5 Benchmarking
5.5.1 What is benchmarking?
Benchmarking is the continuous search for and adaptation of significantly
better practices that leads to superior performance by investigating the
performance and practices of other organizations (benchmark partners). In
addition, it can create a crisis to facilitate the change process.
Benchmarking goes beyond comparisons with competitors to understanding the
practices that lie behind the performance gaps. It is not a method for 'copying' the
practices of competitors, but a way of seeking superior process performance by
looking outside the industry. Benchmarking makes it possible to gain competitive
superiority rather than competitive parity. The term benchmark refers to the
reference point by which performance is measured against. It is the indicator of
what can and is being achieved. The term benchmarking refers to the actual activity
of establishing benchmarks and 'best' practices.
It must be noted, however, that there will undoubtedly be difficulties encountered
when benchmarking. Many of them are detailed in the corresponding document
"Guide to Benchmarking" under "factors to be aware of". Significant effort and
attention to detail is required to ensure that problems are minimised.
5.5.2Why do you need to benchmark?
There are many benefits of benchmarking. The following list summarises the main
benefits:
•
provides realistic and achievable targets
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•
prevents companies from being industry led
•
challenges operational complacency
•
creates an atmosphere conducive to continuous improvement
•
allows employees to visualise the improvement which can be a strong
motivator for change
•
creates a sense of urgency for improvement
•
confirms the belief that there is a need for change
•
helps to identify weak areas and indicates what needs to be done to improve.
For example, quality performance in the 96 to 98% range was considered excellent
in the early 1980's. However, Japanese companies, in the meantime, were
measuring quality by a few hundred parts per million by focusing on process
control to ensure quality consistency.
Thus, benchmarking is the only real way to assess industrial competitiveness and to
determine how one company's process performance compares to other companies'.
5.5.3 Types of Benchmarking
There are four types of benchmarking. They are not mutually exclusive and
companies can choose any one or a combination to meet their objectives. It is
recommended that strategic benchmarking is conducted first to create a context and
rationale that will enhance all other benchmarking efforts.
1. Strategic Benchmarking
Concerned with comparing different companies' strategies and assessing the success
of those strategies in the marketplace.
Analyses the strategies with particular reference to:
•
strategic intent
•
core competencies
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•
process capability
•
product line
•
strategic alliances
•
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Should begin with the needs and expectations of the customer. This can be achieved
through surveys to measure customer satisfaction and the gaps between a
company's performance and its customers' standards.
Ensures a co-ordinated strategic direction regarding benchmarking and reduces the
possibility that one improvement project will cancel out the effect of another.
Benchmarking candidates are normally direct competition.
The main difficulty is persuading the benchmark partner to discuss their strategy.
However, there is a great deal of information which can be obtained from
customers, common suppliers and public domain information.
2. Functional Benchmarking
•
Investigates the performance of core business functions.
•
Does not need to focus on direct competition but, depending on the function
to be benchmarked, the benchmark partner may need to be in a similarly
characterized industry for useful comparisons to be made.
3. Best Practices Benchmarking
•
Applies to business processes.
•
It breaks the function down into discrete areas that are the targets for
benchmarking and is therefore a more focused study than functional
benchmarking.
•
Some business processes are the same regardless of the type of industry.
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•
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Attempts to benchmark not only work processes, but also the management
practices behind them.
4. Product Benchmarking
•
Commonly known as reverse engineering or competitive product analysis.
•
Assesses competitor costs, product concepts, strengths and weaknesses of
alternative designs and competitor design trade-offs, by obtaining, stripping
down and analyzing competitors' products.
The four different types of benchmarking are evolutionary beginning with product,
through to functional, process and strategic. For the purposes of this document and
the corresponding document 'Guide to Benchmarking' best practice benchmarking
will be used due to its focus on processes. As benchmarking is becoming more
widespread and companies are more proficient in its use, best practice
benchmarking is becoming increasingly popular. This is also reinforced by the
move away from functionality in organizations towards business processes. For
further information on the other types of benchmarking, see the references to
Watson, Camp and Miller.
5.5.4 Key steps to benchmarking
The following stages in your Benchmarking projects:
1.
2.
3.
4.
5.
6.
7.
Identify what to benchmark
Ensure management support and involve all stakeholders
Select the benchmarking team
Analysis of internal processes
Identify companies to benchmark
Decide on method(s) of data collection
Collect public domain information
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8. Analyse collected information to establish what other information needs to be
collected
9. Establish contacts with benchmark partners
10.Plan the actual visits
11.Conduct the benchmarking visits
12.Establish whether a performance gap exists
13.Predict future performance levels
14.Communicate benchmark findings
15.Establish targets and action plans
16.Gain support and ownership for the plans and goals
17.Implement the action plans, measure performance and communicate progress
18.Re-calibrate benchmarks
19.Adopt benchmarking on a company-wide scale
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6.1 Introducing Business strategy
6.1 Introducing
strategy
Chapter 6:
Understanding Business Strategy
“Part One”
6.2 Generic
Strategies
Business
Competitive
7.3 Critical Success Factor
7.4 Core Competency.
A business strategy is the means by which it sets out to achieve its desired
objectives. It can simply be described as a long-term business plan. Typically a
business strategy will cover a period of about 3-5 years (sometimes even longer).
Business level strategies focus on how businesses compete and how they provide
value to the customer through a specific product or service
– Competitive
advantage.
A business strategy is concerned with major resource issues e.g. raising the finance
to build a new factory or plant. Strategies are also concerned with deciding on what
products to allocate major resources. They are concerned with the scope of a
business' activities i.e. what and where they produce. For example, BIC's scope is
focused on three main product areas - lighters, pens, and razors, and they have
developed super-factories in key geographical locations to produce these items.
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6.2 Generic Competitive Strategies
Three of the most widely read books on competitive analysis in the 1980s were
Michael Porter's Competitive Strategy, Competitive Advantage, and Competitive
Advantage of Nations. In his various books, Porter developed three generic
strategies that, he argues, can be used singly or in combination to create a
defendable position and to outperform competitors, whether they are within an
industry or across nations. Porter states that the strategies are generic because they
are applicable to a large variety of situations and contexts. The strategies are (1)
overall cost leadership; (2) differentiation; and (3) focus on a particular market
niche. The following figure illustrates the generic strategies along with competitive
scope and competitive advantage.
Competitive Advantage
Broad Target
Strategic Target
(Industry-wide)
(Competitive Scope)
Narrow Target
Lower Cost
Differentiation
Cost Leadership
Differentiation
Cost Focus
Differentiation
Focus
(Segment)
The generic strategies provide direction for firms in designing incentive systems,
control procedures, and organizational arrangements. Following is a description of
this work.
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6.2.1 Overall Cost Leadership Strategy
Overall cost leadership requires firms to develop policies aimed at becoming and
remaining the lowest-cost producer and/or distributor in the industry. Company
strategies aimed at controlling costs include construction of efficient-scale facilities,
tight control of costs and overhead, avoidance of marginal customer accounts,
minimization of operating expenses, reduction of input costs, tight control of labour
costs, and lower distribution costs. The low-cost leader gains competitive advantage
by getting its costs of production or distribution lower than those of the other firms
in its market. The strategy is especially important for firms selling unbranded
commodities such as beef or steel.
If we assume our firm and the other competitors are producing the product for a
cost of C and selling it at SP, we are all receiving a profit of P. As cost leader, we
are able to lower our cost to C while the competitors remain at C. We now have two
choices as to how to take advantage of our reduced costs.
1. Department stores and other high-margin firms often leave their selling price
as SP, the original selling price. This allows the low-cost leader to obtain a
higher profit margin than they received before the reduction in costs. Since
the competition was unable to lower their costs, they are receiving the
original, smaller profit margin. The cost leader gains competitive advantage
over the competition by earning more profit for each unit sold.
2. Discount stores such as Wal-Mart are more likely to pass the savings from
the lower costs on to customers in the form of lower prices. These
discounters retain the original profit margin, which is the same margin as
their competitors. However, they are able to lower their selling price due to
their lower costs (C). They gain competitive advantage by being able to
under-price the competition while maintaining the same profit margin.
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Overall cost leadership is not without potential problems. Two or more firms
competing for cost leadership may engage in price wars that drive profits to very
low levels. Ideally, a firm using a cost leader strategy will develop an advantage
that is not easily copied by others. Cost leaders also must maintain their investment
in state-of-the-art equipment or face the possible entry of more cost-effective
competitors. Major changes in technology may drastically change production
processes so that previous investments in production technology are no longer
advantageous. Finally, firms may become so concerned with maintaining low costs
that needed changes in production or marketing are overlooked. The strategy may
be more difficult in a dynamic environment because some of the expenses that firms
may seek to minimize are research and development costs or marketing research
costs, yet these are expenses the firm may need to incur in order to remain
competitive.
6.2.2 Differentiation Strategy
The second generic strategy, differentiating the product or service, requires a firm
to create something about its product or service that is perceived as unique
throughout the industry. Whether the features are real or just in the mind of the
customer, customers must perceive the product as having desirable features not
commonly found in competing products. The customers also must be relatively
price-insensitive. Adding product features means that the production or distribution
costs of a differentiated product may be somewhat higher than the price of a
generic, non-differentiated product. Customers must be willing to pay more than the
marginal cost of adding the differentiating feature if a differentiation strategy is to
succeed.
Differentiation may be attained through many features that make the product or
service appear unique. Possible strategies for achieving differentiation may include:
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•
warranties (e.g., Sears tools)
•
brand image (e.g., Coach handbags, Tommy Hilfiger sportswear)
•
technology (e.g., Hewlett-Packard laser printers)
•
features (e.g., Jenn-Air ranges, Whirlpool appliances)
•
service (e.g., Makita hand tools)
•
quality/value (e.g., Walt Disney Company)
•
dealer network (e.g., Caterpillar construction equipment)
Differentiation does not allow a firm to ignore costs; it makes a firm's products less
susceptible to cost pressures from competitors because customers see the product as
unique and are willing to pay extra to have the product with the desirable features.
Differentiation can be achieved through real product features or through advertising
that causes the customer to perceive that the product is unique.
Differentiation may lead to customer brand loyalty and result in reduced price
elasticity. Differentiation may also lead to higher profit margins and reduce the
need to be a low-cost producer. Since customers see the product as different from
competing products and they like the product features, customers are willing to pay
a premium for these features. As long as the firm can increase the selling price by
more than the marginal cost of adding the features, the profit margin is increased.
Firms must be able to charge more for their differentiated product than it costs them
to make it distinct, or else they may be better off making generic, undifferentiated
products. Firms must remain sensitive to cost differences. They must carefully
monitor the incremental costs of differentiating their product and make certain the
difference is reflected in the price.
Firms pursuing a differentiation strategy are vulnerable to different competitive
threats than firms pursuing a cost leader strategy. Customers may sacrifice features,
service, or image for cost savings. Customers who are price sensitive may be
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willing to forgo desirable features in favour of a less costly alternative. This can be
seen in the growth in popularity of store brands and private labels. Often, the same
firms that produce name-brand products produce the private label products. The two
products may be physically identical, but stores are able to sell the private label
products for a lower price because very little money was put into advertising in an
effort to differentiate the private label product.
Imitation may also reduce the perceived differences between products when
competitors copy product features. Thus, for firms to be able to recover the cost of
marketing research or R&D, they may need to add a product feature that is not
easily copied by a competitor.
A final risk for firms pursuing a differentiation strategy is changing consumer
tastes. The feature that customers like and find attractive about a product this year
may not make the product popular next year. Changes in customer tastes are
especially obvious in the apparel industry. Polo Ralph Lauren has been a very
successful brand in the fashion industry. However, some younger consumers have
shifted to Tommy Hilfiger and other youth-oriented brands.
Ralph Lauren, founder and CEO, has been the guiding light behind his company's
success. Part of the firm's success has been the public's association of Lauren with
the brand. Ralph Lauren leads a high-profile lifestyle of preppy elegance. His
appearance in his own commercials, his Manhattan duplex, his Colorado ranch, his
vintage car collection, and private jet have all contributed to the public's fascination
with the man and his brand name. This image has allowed the firm to market
everything from suits and ties to golf balls. Through licensing of the name, the
Lauren name also appears on sofas, soccer balls, towels, table-ware, and much
more.
6.2.3 Combinations Strategies
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Can forms of competitive advantage be combined? Porter asserts that a successful
strategy requires a firm to aggressively stake out a market position, and that
different strategies involve distinctly different approaches to competing and
operating the business. An organization pursuing a differentiation strategy seeks
competitive advantage by offering products or services that are unique from those
offered by rivals, either through design, brand image, technology, features, or
customer service. Alternatively, an organization pursuing a cost leadership strategy
attempts to gain competitive advantage based on being the overall low-cost provider
of a product or service. To be "all things to all people" can mean becoming "stuck
in the middle" with no distinct competitive advantage. The difference between
being "stuck in the middle" and successfully pursuing combination strategies merits
discussion. Although Porter describes the dangers of not being successful in either
cost control or differentiation, some firms have been able to succeed using
combination strategies.
Research suggests that, in some cases, it is possible to be a cost leader while
maintaining a differentiated product. Southwest Airlines has combined cost cutting
measures with differentiation. The company has been able to reduce costs by not
assigning seating and by eliminating meals on its planes. It has then been able to
promote in its advertising that one does not get tasteless airline food on its flights.
Its fares have been low enough to attract a significant number of passengers,
allowing the airline to succeed.
Another firm that has pursued an effective combination strategy is Nike. When
customer preferences moved to wide-legged jeans and cargo pants, Nike's market
share slipped. Competitors such as Adidas offered less expensive shoes and
undercut Nike's price. Nike's stock price dropped in 1998 to half its 1997 high.
However, Nike reported a 70 percent increase in earnings for the first quarter of
1999 and saw a significant rebound in its stock price. Nike achieved the turn-around
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by cutting costs and developing new, distinctive products. Nike reduced costs by
cutting some of its endorsements. Company research suggested the endorsement by
the Italian soccer team, for example, was not achieving the desired results. Michael
Jordan and a few other "big name" endorsers were retained while others, such as the
Italian soccer team, were eliminated, resulting in savings estimated at over $100
million. Firing 7 percent of its 22,000 employees allowed the company to lower
costs by another $200 million, and inventory was reduced to save additional money.
While cutting costs, the firm also introduced new products designed to differentiate
Nike's products from those of the competition.
6.2.4 Focus Strategy
The generic strategies of cost leadership and differentiation are oriented toward
industry-wide recognition. The final generic strategy, focusing (also called niche or
segmentation strategy), involves concentrating on a particular customer, product
line, geographical area, channel of distribution, stage in the production process, or
market niche. The underlying premise of the focus strategy is that a firm is better
able to serve a limited segment more efficiently than competitors can serve a
broader range of customers. Firms using a focus strategy simply apply a cost leader
or differentiation strategy to a segment of the larger market. Firms may thus be able
to differentiate themselves based on meeting customer needs, or they may be able to
achieve lower costs within limited markets. Focus strategies are most effective
when customers have distinctive preferences or specialized needs.
A focus strategy is often appropriate for small, aggressive businesses that do not
have the ability or resources to engage in a nationwide marketing effort. Such a
strategy may also be appropriate if the target market is too small to support a largescale operation. Many firms start small and expand into a national organization. For
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instance, Wal-Mart started in small towns in the South and Midwest. As the firm
gained in market knowledge and acceptance, it expanded through-out the South,
then nationally, and now internationally. Wal-Mart started with a focused cost
leader strategy in its limited market, and later was able to expand beyond its initial
market segment.
A firm following the focus strategy concentrates on meeting the specialized needs
of its customers. Products and services can be designed to meet the needs of buyers.
One approach to focusing is to service either industrial buyers or consumers, but not
both. Martin-Brower, the third-largest food distributor in the United States, serves
only the eight leading fast-food chains. With its limited customer list, MartinBrower need only stock a limited product line; its ordering procedures are adjusted
to match those of its customers; and its warehouses are located so as to be
convenient to customers.
Firms utilizing a focus strategy may also be better able to tailor advertising and
promotional efforts to a particular market niche. Many automobile dealers advertise
that they are the largest volume dealer for a specific geographic area. Other car
dealers advertise that they have the highest customer satisfaction scores within their
defined market or the most awards for their service department.
Firms may be able to design products specifically for a customer. Customization
may range from individually designing a product for a customer to allowing
customer input into the finished product. Tailor-made clothing and custom-built
houses include the customer in all aspects of production, from product design to
final acceptance. Key decisions are made with customer input. However, providing
such individualized attention to customers may not be feasible for firms with an
industry-wide orientation.
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Other forms of customization simply allow the customer to select from a menu of
predetermined options. Burger King advertises that its burgers are made "your
way," meaning that the customer gets to select from the predetermined options of
pickles, lettuce, and so on. Similarly, customers are allowed to design their own
automobiles within the constraints of predetermined colours, engine sizes, interior
options, and so forth.
Potential difficulties associated with a focus strategy include a narrowing of
differences between the limited market and the entire industry. National firms
routinely monitor the strategies of competing firms in their various submarkets.
They may then copy the strategies that appear particularly successful. The national
firm, in effect, allows the focused firm to develop the concept, then the national
firm may emulate the strategy of the smaller firm or acquire it as a means of gaining
access to its technology or processes. Emulation increases the ability of other firms
to enter the market niche while reducing the cost advantages of serving the
narrower market.
Market size is always a problem for firms pursing a focus strategy. The targeted
market segment must be large enough to provide an acceptable return so that the
business can survive. For instance, ethnic restaurants are often unsuccessful in small
U.S. towns, since the population base that enjoys Japanese or Greek cuisine is too
small to allow the restaurant operator to make a profit. Likewise, the demand for an
expensive, upscale restaurant is usually not sufficient in a small town to make its
operation economically feasible.
Another potential danger for firms pursuing a focus strategy is that competitors may
find submarkets within the target market. In the past, United Parcel Service (UPS)
solely dominated the package delivery segment of the delivery business. Newer
competitors such as Federal Express and Roadway Package Service (RPS) have
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entered the package delivery business and have taken customers away from UPS.
RPS contracts with independent drivers in a territory to pick up and deliver
packages, while UPS pays unionized wages and benefits to its drivers. RPS started
operations in 1985 with 36 package terminals. By 1999 it was a $1 billion company
with 339 facilities.
6.3 Critical Success Factor
Critical Success Factors (CSF’s) are the critical factors or activities required for
ensuring the success your business. The term was initially used in the world of data
analysis, and business analysis. Critical Success Factors have been used
significantly to present or identify a few key factors that organizations should focus
on to be successful.
As a definition, critical success factors refer to "the limited number of areas in
which satisfactory results will ensure successful competitive performance for the
individual, department, or organization”.
A critical success factor is not a key performance indicator (KPI). Critical success
factors are elements that are vital for a strategy to be successful. KPIs are measures
that quantify management objectives and enable the measurement of strategic
performance. A critical success factor is what drives the company forward, it is
what makes the company or breaks the company. As staff must ask themselves
everyday 'Why would customers choose us?' and they will find the answer is the
critical success factors.
An example:
•
KPI = Number of new customers.
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•
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CSF = Installation of a call centre for providing quotations.
Statistical research into CSF’s on organizations has shown there to be seven key
areas. These CSF's are:
1. Training and education
2. Quality data and reporting
3. Management commitment, customer satisfaction
4. Staff Orientation
5. Role of the quality department
6. Communication to improve quality, and
7. Continuous improvement
These were identified when Total Quality was at its peak, so as you can see have a
bias towards quality matters. You may or may not feel that these are right or indeed
critical for your organization.
There are four basic types of CSF's:
1. Industry CSF's resulting from specific industry characteristics;
2. Strategy CSF's resulting from the chosen competitive strategy of the
business;
3. Environmental CSF's resulting from economic or technological changes;
and
4. Temporal CSF's resulting from internal organizational needs and changes.
Things that are measured get done more often than things that are not measured.
Each CSF should be measurable and associated with a target goal. You don't need
exact measures to manage. Primary measures that should be listed include critical
success levels (such as number of transactions per month) or, in cases where
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specific measurements are more difficult, general goals should be specified (such as
moving up in an industry customer service survey).
6.4 Core Competency.
Core competency is a unique skill or technology that creates distinct customer
value. For instance, core competency of Federal express (Fed Ex) is logistics
management. The organizational unique capabilities are mainly personified in the
collective knowledge of people as well as the organizational system that influences
the way the employees interact. As an organization grows, develops and adjusts to
the new environment, so do its core competencies also adjust and change. Thus,
core competencies are flexible and developing with time. They do not remain rigid
and fixed. The organization can make maximum utilization of the given resources
and relate them to new opportunities thrown by the environment.
Resources and capabilities are the building blocks upon which an organization
create and execute value-adding strategy so that an organization can earn reasonable
returns and achieve strategic competitiveness.
Figure: Core Competence Decision
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Resources are inputs to a firm in the production process. These can be human,
financial, technological, physical or organizational. The more unique, valuable and
firm specialized the resources are, the more possibly the firm will have core
competency. Resources should be used to build on the strengths and remove the
firm’s weaknesses. Capabilities refer to organizational skills at integrating it’s team
of resources so that they can be used more efficiently and effectively.
Organizational capabilities are generally a result of organizational system,
processes and control mechanisms. These are intangible in nature. It might be that a
firm has unique and valuable resources, but if it lacks the capability to utilize those
resources productively and effectively, then the firm cannot create core
competency. The organizational strategies may develop new resources and
capabilities or it might make stronger the existing resources and capabilities, hence
building the core competencies of the organization.
Core competencies help an organization to distinguish its products from it’s rivals
as well as to reduce its costs than its competitors and thereby attain a competitive
advantage. It helps in creating customer value. Also, core competencies help in
creating and developing new goods and services. Core competencies decide the
future of the organization. These decide the features and structure of global
competitive organization. Core competencies give way to innovations. Using core
competencies, new technologies can be developed. They ensure delivery of quality
products and services to the clients.
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Chapter 7:
Understanding Business
Dr. Sackour_2018
7.1 Industry Life Cycle
7.2 The Growth-Share Matrix and
Portfolio
Strategy
“Part Two”
Analysis
(the
BCG
Matrix)
7.3 The Product/Market Expansion
Grid ( The Ansoff Matrix)
7.4 References for Further Reading
7.1 Industry Life Cycle
Life cycle models are not just a phenomenon of the life sciences. Industries
experience a similar cycle of life. Just as a person is born, grows, matures, and
eventually experiences decline and ultimately death, so too do industries. The stages
are the same for all industries, yet industries cycle through the stages in various
lengths of time. Even within the same industry, various firms may be at different
life cycle stages. Strategies of a firm as well as of competitors vary depending on
the stage of the life cycle. Some industries even find new uses for declining
products, thus extending the life cycle. Others send products abroad in hopes of
extending their life.
The growth of an industry's sales over time is used to chart the life cycle. The
distinct stages of an industry life cycle are: introduction, growth, maturity, and
decline. The following figure illustrates sales/profits indicators over the industry life
cycle stages.
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Sales typically begin slowly at the introduction phase, then take off rapidly during
the growth phase. After levelling out at maturity, sales then begin a gradual decline.
In contrast, profits generally continue to increase throughout the life cycle, as
companies in an industry take advantage of expertise and economies of scale and
scope to reduce unit costs over time.
7.1.1 Stages of the Life Cycle
INTRODUCTION: In the introduction stage of the life cycle, an industry is in its
infancy. Perhaps a new, unique product offering has been developed and patented,
thus beginning a new industry. Some analysts even add an embryonic stage before
introduction. At the introduction stage, the firm may be alone in the industry. It may
be a small entrepreneurial company or a proven company which used research and
development funds and expertise to develop something new. Marketing refers to
new product offerings in a new industry as "question marks" because the success of
the product and the life of the industry is unproven and unknown.
A firm will use a focus strategy at this stage to stress the uniqueness of the new
product or service to a small group of customers. These customers are typically
referred to in the marketing literature as the "innovators" and "early adopters."
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Marketing tactics during this stage are intended to explain the product and its uses
to consumers and thus create awareness for the product and the industry. According
to research by Hitt, Ireland, and Hoskisson, firms establish a niche for dominance
within an industry during this phase. For example, they often attempt to establish
early perceptions of product quality, technological superiority, or advantageous
relationships with vendors within the supply chain to develop a competitive
advantage.
Because it costs money to create a new product offering, develop and test
prototypes, and market the product from its embryonic stage to introduction, the
firm's and the industry's profits are usually negative at this stage. Any profits are
typically reinvested into the company to further prepare it for the next life cycle
stage. Introduction requires a significant cash outlay to continue to promote and
differentiate the offering and expand the production flow from a job shop to
possibly a batch flow. Market demand will grow from the introduction, and as the
life cycle curve experiences growth at an increasing rate, the industry is said to be
entering the growth stage. Firms may also cluster together in close proximity during
the early stages of the industry life cycle to have access to key materials or
technological expertise, as in the case of the U.S. Silicon Valley computer chip
manufacturers.
GROWTH: Like the introduction stage, the growth stage also requires a significant
amount of capital for the firm. The goal of marketing efforts at this stage is to
differentiate a firm's offerings from other competitors within the industry. Thus the
growth stage requires funds to launch a newly focused marketing campaign as well
as funds for continued investment in property, plant, and equipment to facilitate the
growth required by the market demands. However, the industry is experiencing
more product standardization at this stage, which may encourage economies of
scale and facilitate development of a line-flow layout for production efficiency.
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Research and development funds will be needed to make changes to the product or
services to better reflect customer's needs and suggestions. In this stage, if the firm
is successful in the market, growing demand will create sales growth. Earnings and
accompanying assets will also grow and profits will be positive for the firms.
Marketing often refers to products at the growth stage as "stars." These products
have high growth and market share. The key issue in this stage is market rivalry.
Because there is industry-wide acceptance of the product, more new entrants join
the industry and more intense competition results.
The duration of the growth stage, as all the other stages, depends on the particular
industry under study. Some items—like fad clothing, for example—may experience
a very short growth stage and move almost immediately into the next stages of
maturity and decline. A hot toy this holiday season may be nonexistent or relegated
to the back shelves of a deep-discounter the following year. Because many new
product introductions fail, the growth stage may be short for some products.
However, for other products the growth stage may be longer due to frequent
product upgrades and enhancements that forestall movement into maturity. The
computer industry today is an example of an industry with a long growth stage due
to upgrades in hardware, services, and add-on products and features.
During the growth stage, the life cycle curve is very steep, indicating fast growth.
Firms tend to spread out geographically during this stage of the life cycle and
continue to disperse during the maturity and decline stages. As an example, the
automobile industry in the United States was initially concentrated in the Detroit
area and surrounding cities. Today, as the industry has matured, automobile
manufacturers are spread throughout the country and internationally.
MATURITY: As the industry approaches maturity, the industry life cycle curve
becomes noticeably flatter, indicating slowing growth. Some experts have labelled
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an additional stage, called expansion, between growth and maturity. While sales are
expanding and earnings are growing from these "cash cow" products, the rate has
slowed from the growth stage. In fact, the rate of sales expansion is typically equal
to the growth rate of the economy.
Some competition from late entrants will be apparent, and these new entrants will
try to steal market share from existing products. Thus, the marketing effort must
remain strong and must stress the unique features of the product or the firm to
continue to differentiate a firm's offerings from industry competitors. Firms may
compete on quality to separate their product from other lower-cost offerings, or
conversely the firm may try a low-cost/low-price strategy to increase the volume of
sales and make profits from inventory turnover. A firm at this stage may have
excess cash to pay dividends to shareholders. But in mature industries, there are
usually fewer firms, and those that survive will be larger and more dominant. While
innovations continue they are not as radical as before and may be only a change in
colour or formulation to stress "new" or "improved" to consumers. Laundry
detergents are examples of mature products.
DECLINE: Declines are almost inevitable in an industry. If product innovation has
not kept pace with other competitors, or if new innovations or technological changes
have caused the industry to become obsolete, sales suffer and the life cycle
experiences a decline. In this phase, sales are decreasing at an accelerating rate,
causing the plotted curve to trend downward. Profits may continue to rise, however.
There is usually another, larger shake-out in the industry as competitors who did not
leave during the maturity stage now exit the industry. Yet some firms will remain to
compete in the smaller market. Mergers and consolidations will also be the norm as
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firms try other strategies to continue to be competitive or grow through acquisition
and/or diversification.
7.2 The Growth-Share Matrix and Portfolio Analysis (the BCG
Matrix)
The origin of the Boston Matrix lies with the Boston Consulting Group in the early
1970s. It was devised as a clear and simple method for helping corporations decide
which parts of their business they should allocate their available cash to. Today, this
is as important as ever because of the limited availability of credit.
The Boston Matrix is a good tool for thinking about where to apply other finite
resources: people, time and equipment. It provides a useful way of looking at the
opportunities open to you, and helps you analyse which segments of your business
are in a good position – and which ones aren’t. That way, you can decide on the
most appropriate investment strategy for your business in the future, and where best
to allocate your resources.
7.2.1 Understanding the Model
7.2.1.1 Market Share and Market Growth
To understand the Boston Matrix you need to understand how market share and
market growth interrelate. Market share is the percentage of the total market that is
being serviced by your company, measured either in revenue terms or unit volume
terms. The higher your market share, the higher proportion of the market you
control.
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The Boston Matrix assumes that if you enjoy a high market share you will normally
be making money (this assumption is based on the idea that you will have been in
the market long enough to have learned how to be profitable, and will be enjoying
scale
economies
that
give
you
an
advantage).
The question it asks is, "Should you be investing your resources into that product
line just because it is making you money?" The answer is, "not necessarily."
This is where market growth comes into play. Market growth is used as a measure
of a market's attractiveness. Markets experiencing high growth are ones where the
total market is expanding, which should provide the opportunity for businesses to
make
more
money,
even
if
their
market
share
remains
stable.
By contrast, competition in low growth markets is often bitter, and while you might
have high market share now, what will the situation look like in a few months or a
few years? This makes low growth markets less attractive.
7.2.1.2 The Matrix Itself
The Boston Matrix categorizes opportunities into four groups, shown on axes of
Market Growth and Market Share:
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10 x
These
Dogs:
1x
Figure: BCG Matrix
groups
Low
are
Market
Share
0.1 x
explained
/
Low
Market
below:
Growth
Dogs represent businesses having weak market shares in low-growth markets. They
neither generate cash nor require huge amount of cash. Due to low market share,
these business units face cost disadvantages. Generally retrenchment strategies are
adopted because these firms can gain market share only at the expense of
competitor’s/rival firms. These business firms have weak market share because of
high costs, poor quality, ineffective marketing, etc. Unless a dog has some other
strategic aim, it should be liquidated if there is fewer prospects for it to gain market
share. Number of dogs should be avoided and minimized in an organization.
Cash
Cows:
High
Market
Share
/
Low
Market
Growth
Cash Cows represents business units having a large market share in a mature, slow
growing industry. Cash cows require little investment and generate cash that can be
utilized for investment in other business units. These SBU’s are the corporation’s
key source of cash, and are specifically the core business. They are the base of an
organization. These businesses usually follow stability strategies. When cash cows
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loose their appeal and move towards deterioration, then a retrenchment policy may
be pursued.
Stars:
High
Market
Share
/
High
Market
Growth
Stars represent business units having large market share in a fast growing industry.
They may generate cash but because of fast growing market, stars require huge
investments to maintain their lead. Net cash flow is usually modest. SBU’s located
in this cell are attractive as they are located in a robust industry and these business
units are highly competitive in the industry. If successful, a star will become a cash
cow when the industry matures.
Question Marks (Problem Child): Low Market Share / High Market Growth
Question marks represent business units having low relative market share and
located in a high growth industry. They require huge amount of cash to maintain or
gain market share. They require attention to determine if the venture can be viable.
Question marks are generally new goods and services which have a good
commercial prospective. There is no specific strategy which can be adopted. If the
firm thinks it has dominant market share, then it can adopt expansion strategy, else
retrenchment strategy can be adopted. Most businesses start as question marks as
the company tries to enter a high growth market in which there is already a marketshare. If ignored, then question marks may become dogs, while if huge investment
is
made,
then
they
have
potential
of
becoming
stars.
Question Marks might become Stars and eventual Cash Cows, but they could just as
easily absorb effort with little return. These opportunities need serious thought as to
whether increased investment is warranted.
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In a following chapter, we will discuss how to use the Growth-Share Matrix (the
BCG Matrix).
7.3 The Product/Market Expansion Grid ( the Ansoff Matrix)
For a whole variety of reasons, there are times when as an individual or in business
you want or need to expand or change your field or market. In business, you might
need to achieve economies of scale, make more money for investors, or gain
national or even global recognition of their brand. As an individual, you may want
to change company, or even career.
Having decided that you want to grow your business or career, you’ll have
hundreds of ideas about things you could do. For your business, this means new
products, new markets, new channels, or new marketing campaigns. For your
career, it means new skills, new roles, and even new industries. That’s great! But
which ones should you choose? And why?
Using a strategic approach, such as the Ansoff Model or Matrix, helps you evaluate
your options and choose the one that suits your situation best, and gives you the
best return on the potentially considerable investment that you’ll need to make.
7.3.1 Understanding the Tool
The Ansoff Matrix was first published in the Harvard Business Review in 1957,
and has given generations of marketers and small business leaders a quick and
simple way to develop a strategic approach to growth.
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Sometimes called the Product/Market Expansion Grid, it shows four growth options
for business formed by matching up existing and new products and services with
existing and new markets, as shown in Figure 1 below.
The Matrix essentially shows the risk that a particular strategy will expose you to,
the idea being that each time you move into a new quadrant (horizontally or
vertically) you increase risk.
7.3.2 The Corporate Ansoff Matrix
Looking at it from a business perspective, staying with your existing product in
your existing market is a low risk option: You know the product works, and the
market
holds
few
surprises
for
you.
However, you expose yourself to a whole new level of risk either moving into a
new market with an existing product, or developing a new product for an existing
market. The market may turn out to have radically different needs and dynamics
than you thought, or the new product may just not work or sell.
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And by moving two quadrants and targeting a new market with a new product, you
increase your risk to yet another level!
In Chapter 8, we will discuss how to use The Product/Market Expansion Grid ( the
Ansoff Matrix)
Chapter 8:
Empirical Cases
8.1 Mini-Cases about industry
life cycle
8.2 How to Use The GrowthShare Matrix and Portfolio
Analysis (the BCG Matrix)
8.3 How to Use the
Product/Market Expansion Grid
( the Ansoff Matrix)
8.4 Case Study: Experian
“Entering a new market with a
new product”
8.1 Mini-Cases about industry life cycle
1. Introduction Stage
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In 1985, Ryanair made a huge change in the European airline industry. Ryanair was
the first airline to engage low-cost airlines in Europe. At that time, Ryanair's
services were perceived as the innovation of the European airline industry (Le Bel,
2005). Ryanair tickets are half the price of British Airways. Some of its sales
promotions were as low as £0.01. This made people think that air travel was not just
made for the rich, but everybody (Haley & Tan 1999).
Ryanair overcame the twin problems of innovation and invention in the airline
industry by inventing air travel services that could serve passengers with tight
budgets and those who just wanted to reach their destination without breaking their
bank savings. Ryanair achieved this goal by eliminating unnecessary services
offered by traditional airlines (Kaynak & Kucukemiroglu, 1993). It does not offer
free meals, uses paper-free air tickets, gets rid of mile collecting scheme, utilises
secondary airports, and offers frequent flights. These techniques help Ryanair save
time and costs spent in airline business operation (Haley & Tan 1999).
2. Growth Stage
Many people die and suffer because of cigarettes every year. Thus, the UK
government decided to launch a campaign to encourage people to quit smoking.
Nicorette, one of the leading companies is producing several nicotine products to
help people quit smoking. Some of its well-known products include Nicorette
patches, Nicolette gums and Nicorette lozenges (Nicorette 2007).
Smokers began to see an easy way to quit smoking. The new industry started to
attract brand recognition and brand awareness among its target market during the
shake-out stage (Hendrickson et al., 2006). Nicorette's products began to gain
popularity among those who wanted to quit smoking or those who wanted to reduce
their daily cigarette consumption.
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During this period, another company realized the opportunity in this market and
decided to enter it by launching nicotine product ranges, including Nic Lite gum
and patches. It recently went beyond UK boarder after the UK government
introduced non-smoking policy in public places, including pubs and nightclubs.
This business threat created a new business opportunity in the industry for Nic Lite
to launch a new nicotine-related product called Nic Time (ABC News 2006).
Nic Time is a whole new way for smokers to "get a cigarette" – an eight-ounce
bottle contains a lemon-flavoured drink laced with nicotine, the same amount of
nicotine as two cigarettes (ABC News 2006). Nic Lite was first available at Los
Angeles airports for smokers who got uneasy on flights, but now the nicotine soft
drinks are available in some convenience stores (ABC News 2006).
3. Maturity Stage
Toyota is one of the world's leading multinational companies, selling automobiles
to customers worldwide. The export and import taxes mean that its cars lose
competitiveness to the local competitors, especially in the European automobile
industry. As a result, Toyota decided to open a factory in the UK in order to
produce cars and sell them to customers in the European market (Toyota, 2007).
The haute couture fashion industry is another good example. There are many
western-branded fashion labels that manufacture their products overseas by
cooperating with overseas partners, or they could seek foreign suppliers who
specialise in particular materials or items. For instance, Nike has factories in China
and Thailand as both countries have cheap labour costs and cheap, quality
materials, particularly rubber and fabric. However, their overseas partners are not
allowed to sell shoes produced for Adidas and Nike (Harrison & Boyle, 2006). The
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items have to be shipped back to the US, and then will be exported to countries
worldwide, including China and Thailand.
4. Decline Stage
At the beginning of the communication industry, pagers were used as the main
communication method among people working in the same organization, such as
doctors and nurses. Then, the cutting edge of the communication industry emerged
in the form of the mobile phone. The communication process of pagers could not be
accomplished without telephones. To send a message to another pager, the user had
to phone the call-centre staff who would type and send the message to another
pager. On the other hand, people who use mobile phones can make a phone-call and
send messages to other mobiles without going through call-centre staff (Hui et al.,
2002).
In recent years, the features of mobile phones have been developing rapidly and
continually. Now people can use mobiles to send multimedia messages, take
pictures, check email, surf the internet, read news and listen to music (Hui et al.,
2002). As mobile phone feature development has reached saturation, thus the new
innovation of mobile phone technology has incorporated the use of computers.
The launch of personal digital assistants (PDA) is a good example of the decline
stage of the mobile phone industry as the features of most mobiles are similar.
PDAs are hand-held computers that were originally designed as a personal
organiser but it become much more multi-faceted in recent years. PDAs are known
as pocket computers or palmtop computers (Wikipedia, 2007). They have many
uses for both mobile phones and computers such as computer games, global
positioning system, video recording, typewriting and wireless wide-area network
(Wikipedia, 2007).
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8.2 How to Use The Growth-Share Matrix and Portfolio Analysis
(the BCG Matrix)
To use the Boston Matrix to look at your opportunities, use the following steps:
Step One: Plot your opportunities in terms of their relative market presence, and
market growth
Step Two: Classify them into one of the four categories. If a product seems to fall
into one the first three quadrants, take a real hard look at the situation and rely on
past performance to help you decide which side you will place it.
Step Three: Determine what you will do with each product/product line. There are
typically four different strategies to apply:
•
Build Market Share: Make further investments (for example, to maintain Star
status, or turn a Question Mark into a Star)
•
Hold: Maintain the status quo (do nothing)
•
Harvest: Reduce the investment (enjoy positive cash flow and maximize
profits from a Star or Cash Cow)
•
Divest: For example, get rid of the Dogs, and use the capital to invest in Stars
and some Question Marks.
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The Boston Matrix is an effective tool for quickly assessing the options open to
you, both on a corporate and personal basis.
With its easily understood classification into "Dogs", "Cash Cows", "Question
Marks" and "Stars", it helps you quickly and simply screen the opportunities open
to you, and helps you think about how you can make the most of them.
8.3 How to Use the Product/Market Expansion Grid ( the Ansoff
Matrix)
The following figure shows the matrix.
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Use of the tool is straightforward. The table below shows how you might classify
different approaches.
Market Development
Diversification
Here, you’re targeting new markets, or
new areas of the market. You’re trying to
sell more of the same things to different
people. Here you might:
•
•
•
Target different geographical
markets at home or abroad
Use different sales channels, such as
online or direct sales if you are
currently selling through the trade
Target different groups of people,
perhaps different age groups,
genders or demographic profiles
from your normal customers.
This strategy is risky: There’s often
little scope for using existing expertise
or achieving economies of scale,
because you are trying to sell
completely different products or
services to different customers
Its main advantage is that, should one
business suffer from adverse
circumstances, the other is unlikely to
be affected.
Market Penetration
Product Development
With this approach, you’re trying to sell
more of the same things to the same
people. Here you might:
Here, you’re selling more things to the
same people. Here you might:
•
•
Advertise, to encourage more people
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•
•
•
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within your existing market to
choose your product, or to use more
of it
Introduce a loyalty scheme
Launch price or other special offer
promotions
Increase your sales force activities,
or
Buy a competitor company
(particularly in mature markets)
•
•
packaging existing products it in
new ways
Develop related products or
services (for example, a
domestic plumbing company
might add a tiling service – after
all, if they’re plumbing in a new
kitchen, most likely tiling will be
needed!)
In a service industry, increase
your time to market, customer
service levels, or quality.
8.4 Case Study: Experian “Entering a new market with a new
product”
Decision-makers within organisations need to look into the future. As they do so,
their thinking should focus on their customers. These should include existing
customers and potential customers who have so far not taken up products from that
organisation. In an age when credit is more widely available than ever, this case
study focuses on a new product launched by Experian, a global information
solutions company which runs one of the UK's leading credit reference agencies.
Experian traditionally deals with business-to-business customers. This case study
illustrates how Experian has developed a new product called CreditExpert for
consumers. Experian operates in more than 60 countries. It has over 20 years’
experience in providing financial, statistical and marketing information to
businesses and consumers. Building partnerships with companies is Experian’s core
business. For example, when banks, credit card companies and other financial
services organisations lend money, they need information they can rely on.
Lending money involves an element of risk. Experian’s information helps them
with the decisions they have to take. As a credit reference agency (CRA), Experian
enables different lenders, such as banks, to share information about their customers’
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credit accounts. The lender can then use this information to help it to decide
whether somebody can afford to repay any borrowings. It looks at how much credit
the customer already has. It also looks at how they are managing this. Lenders pay a
fee to the CRA each time they search its records. Consumers give permission for
their credit report information to be looked at when they apply for credit and for
their account information to be stored with a CRA. People have a legal right to see
the information about them held by a CRA. Experian charges consumers £2, the
statutory fee set by the Consumer Credit Act, to provide a copy of the information
held on a credit report (sometimes called a credit file). People receiving formal debt
counselling receive their credit report free.
Chapter 9:
Understanding Corporate
Strategy
9.1 What is Corporate Strategy
9.2 Strategic Group
9.3 Vertical Integration
10.4 Vertical Expansion
10.5 Related Diversification or
Unrelated Diversification
10.6 Strategic Alliances
9.1 What is Corporate Strategy
Corporate Strategy is concerned with the overall purpose and scope of the
business to meet stakeholder expectations. This is a crucial level since it is heavily
influenced by investors in the business and acts to guide strategic decision-making
throughout the business. It is an approach to future that involves:
(1) examination of the current and anticipated factors associated with customers
and competitors (external environment) and the firm itself (internal environment),
(2) envisioning a new or effective role for the firm in a creative manner, and
(3) aligning policies, practices, and resources to realize that vision.
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9.2 Strategic group
A strategic group is a concept used in strategic management that groups
companies within an industry that have similar business models or similar
combinations of strategies. For example, the restaurant industry can be divided into
several strategic groups including fast-food and fine-dining based on variables such
as preparation time, pricing, and presentation. The number of groups within an
industry and their composition depends on the dimensions used to define the
groups. Strategic management professors and consultants often make use of a two
dimensional grid to position firms along an industry's two most important
dimensions in order to distinguish direct rivals (those with similar strategies or
business models) from indirect rivals.
Hunt (1972) coined the term strategic group while conducting an analysis of the
appliance industry after he discovered a higher degree of competitive rivalry than
suggested by industry concentration ratios. He attributed this to the existence of
subgroups within the industry that competed along different dimensions making
tacit collusion more difficult. These asymmetrical strategic groups caused the
industry to have more rapid innovation, lower prices, higher quality and lower
profitability than traditional economic models would predict.
Michael Porter (1980) developed the concept and applied it within his overall
system of strategic analysis. He explained strategic groups in terms of what he
called "mobility barriers". These are similar to the entry barriers that exist in
industries, except they apply to groups within an industry. Because of these
mobility barriers a company can get drawn into one strategic group or another.
Strategic groups are not to be confused with Porter's generic strategies which are
internal strategies and do not reflect the diversity of strategic styles within an
industry.
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9.2.1 Strategic Group Analysis
Strategic Group Analysis (SGA) aims to identify organizations with similar
strategic characteristics, following similar strategies or competing on similar bases.
Such groups can usually be identified using two or perhaps three sets of
characteristics as the bases of competition.
Examples of Characteristics
•
Extent of product (or service) diversity
•
Extent of Geographic coverage
•
Number of Market segments served
•
Distribution Channels used
•
Extent of Branding
Use of Strategic Group Analysis This analysis is useful in several ways:
•
Helps identify who the most direct competitors are and on what basis they
compete.
•
Raises the question of how likely or possible it is for another organization to
move from one strategic group to another.
•
Strategic Group mapping might also be used to identify opportunities.
•
Can also help identify strategic problems.
9.3 Vertical integration
Vertical integration is the degree to which a firm owns its upstream suppliers and its
downstream buyers. Contrary to horizontal integration, which is a consolidation of
many firms that handle the same part of the production process, vertical integration
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is typified by one firm engaged in different parts of production (e.g. growing raw
materials, manufacturing, transporting, marketing, and/or retailing).
Vertically integrated companies are united through a hierarchy with a common
owner. Usually each member of the hierarchy produces a different product or
(market-specific) service, and the products combine to satisfy a common need. It is
contrasted with horizontal integration. Nineteenth century steel tycoon Andrew
Carnegie introduced the idea of vertical integration. This led other businesspeople
to use the system to promote better financial growth and efficiency in their
companies and businesses.
9.3.1 Three types
There are three varieties: backward (upstream) vertical integration, forward
(downstream) vertical integration, and balanced (both upstream and downstream)
vertical integration.
•
A company exhibits backward vertical integration when it controls
subsidiaries that produce some of the inputs used in the production of its
products. For example, an automobile company may own a tire company, a
glass company, and a metal company. Control of these three subsidiaries is
intended to create a stable supply of inputs and ensure a consistent quality in
their final product. It was the main business approach of Ford and other car
companies in the 1920s, who sought to minimize costs by centralizing the
production of cars and car parts.
•
A company tends toward forward vertical integration when it controls
distribution centers and retailers where its products are sold.
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Balanced vertical integration means a firm controls all of these
components, from raw materials to final delivery.
The three varieties noted are only abstractions; actual firms employ a wide variety
of subtle variations. Suppliers are often contractors, not legally owned subsidiaries.
Still, a client may effectively control a supplier if their contract solely assures the
supplier's profitability. Distribution and retail partnerships exhibit similarly wide
ranges of complexity and interdependence. In relatively open capitalist contexts,
pure vertical integration by explicit ownership is uncommon - and distributing
ownership is commonly a strategy for distributing risk.
9.3.2 Examples
A. Carnegie Steel
One of the earliest, largest and most famous examples of vertical integration
was the Carnegie Steel company. The company controlled not only the mills
where the steel was manufactured but also the mines where the iron ore was
extracted, the coal mines that supplied the coal, the ships that transported the
iron ore and the railroads that transported the coal to the factory, the coke
ovens where the coal was cooked, etc. The company also focused heavily on
developing talent internally from the bottom up, rather than importing it from
other companies. Later on, Carnegie even established an institute of higher
learning to teach the steel processes to the next generation.
B. American Apparel
American Apparel is a fashion retailer and manufacturer that actually
advertises itself as vertically integrated industrial company. The brand is
based in downtown Los Angeles, where from a single building they control
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the dyeing, finishing, designing, sewing, cutting, marketing and distribution
of the company's product. The company shoots and distributes its own
advertisements, often using its own employees as subjects. It also owns and
operates each of its retail locations as opposed to franchising. According to
the management, the vertically integrated model allows the company to
design, cut, distribute and sell an item globally in the span of a week. The
original founder Dov Charney has remained the majority shareholder and
CEO. Since the company controls both the production and distribution of its
product, it is an example of a balanced vertically integrated corporation.
C. Oil industry
Oil companies, both multinational (such as ExxonMobil, Royal Dutch Shell,
ConocoPhillips or BP) and national (e.g. Petronas) often adopt a vertically
integrated structure. This means that they are active all the way along the
supply chain from locating crude oil deposits, drilling and extracting crude,
transporting it around the world, refining it into petroleum products such as
petrol/gasoline, to distributing the fuel to company-owned retail stations,
where it is sold to consumers.
9.3.3 Problems and benefits
There are internal and external (e.g.,[ society-wide) gains and losses due to vertical
integration. They will differ according to the state of technology in the industries
involved, roughly corresponding to the stages of the industry lifecycle.
A. Static technology
This is the simplest case, where the gains and losses have been studied extensively.
Internal gains:
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•
Lower transaction costs
•
Synchronization of supply and demand along the chain of products
•
Lower uncertainty and higher investment
•
Ability to monopolize market throughout the chain by market foreclosure
Internal losses:
•
Higher monetary and organizational costs of switching to other
suppliers/buyers
Benefits to society:
•
Better opportunities for investment growth through reduced uncertainty
Losses to society:
•
Monopolization of markets
•
Rigid organizational structure, having much the same shortcomings as the
socialist economy (cf. John Kenneth Galbraith's works)
•
Monopoly on intermediate components (with opportunity for price gouging)
leads to a throwaway society
B. Dynamic technology
Some argue that vertical integration will eventually hurt a company because when
new technologies are available, the company is forced to reinvest in its
infrastructures in order to keep up with competition. Some say that today, when
technologies evolve very quickly, this can cause a company to invest into new
technologies, only to reinvest in even newer technologies later, thus costing a
company financially. However, a benefit of vertical integration is that all the
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components that are in a company product will work harmoniously, which will
lower downtime and repair costs.
9.4 Vertical expansion
Vertical expansion, in economics, is the growth of a business enterprise through the
acquisition of companies that produce the intermediate goods needed by the
business or help market and distribute its final goods. Such expansion is desired
because it secures the supplies needed by the firm to produce its product and the
market needed to sell the product. The result is a more efficient business with lower
costs and more profits.
Related is lateral expansion, which is the growth of a business enterprise through
the acquisition of similar firms, in the hope of achieving economies of scale.
Vertical expansion is also known as a vertical acquisition. Vertical expansion or
acquisitions can also be used to increase scales and to gain market power. The
acquisition of DirectTV by News Corporation is an example of vertical expansion
or acquisition. DirectTV is a satellite TV company through which News
Corporation can distribute more of its media content: news, movies, and television
shows.
During financial crisis increased transaction costs (particularly credit related),
changed industry structure (“platform companies” moved core processes on both
manufacturing and distribution) and higher risk should make vertical expansion
core area for many companies, especially if targets are available at relatively low
prices.
9.5 Related Diversification or Unrelated Diversification
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10.5.1 Why Diversification?
The two principal objectives of diversification are
1. improving core process execution, and/or
2. enhancing a business unit's structural position.
The fundamental role of diversification is for corporate managers to
create value for stockholders in ways stockholders cannot do better for
themselves. The additional value is created through synergetic
integration of a new business into the existing one thereby increasing its
competitive advantage.
9.5.2 Forms and Means of Diversification
Diversification typically takes one of three forms:
1. Vertical integration – along your value chain
2. Horizontal diversification – moving into new industry
3. Geographical diversification – open up new markets
Means of achieving diversification include internal development, acquisitions,
strategic alliances, and joint ventures. As each route has its own set of issues,
benefits, and limitations, various forms and means of diversification can be mixed
and matched to create a range of options.
9.5.3 What is Related Diversification?
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It is when a business adds or expands its existing product lines or
markets. For example, a phone company that adds or expands its wireless
products and services by purchasing another wireless company is
engaging in related diversification.
With a related diversification strategy you have the advantage of
understanding the business and of knowing what the industry
opportunities and threats are; yet a number of related acquisitions fail to
provide the benefits or returns originally predicted.
Why? It is usually because the diversification analysis under-estimates
the cost of some of the softer issues: change management, integrating
two cultures, handling employees – layoffs and terminations, promotions,
and even recruitment. And on the other side, the diversification analysis
might over-estimate the benefits to be gained in synergies.
9.5.4 What is Unrelated Diversification?
It is when a business adds new, or unrelated, product lines or markets.
For example, the same phone company might decide to go into the
television business or into the radio business. This is unrelated
diversification: there is no direct fit with the existing business.
Why would a company want to engage in unrelated diversification?
Because there may be cost efficiencies. Or the acquisition might provide
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an offsetting cash flow during a seasonal lull. The driver for this
acquisition decision is profit – it needs to be a low risk investment, with
high potential for return.
9.6 Strategic Alliances
Most companies are successful when they do a small number of things really well.
Sometimes, however, those things only take a company so far, and to grow further,
the organization must develop new capabilities.
Strategic alliances link the key capabilities of two or more organizations. The result
is that all parties benefit from the partnership by trading things like skills,
technologies, and products. Essentially, these alliances are partnerships that
companies use to solve a mutual problem, while they remain independent.
Note: A strategic alliance is not the same as a merger, takeover, or acquisition,
which move two previous independent companies into one corporate structure. In
an alliance, the partners share managerial control and work together to achieve
mutual goals, while remaining independent organizations.
A joint venture is also different from a strategic alliance. In a joint venture, the
parties set up a separate company and agree to perform a specific task for a
specific period of time, while they still independently run their separate businesses.
9.6.1 Why Form a Strategic Alliance?
Rather than grow from within, form a joint venture, or enter into a merger, alliances
are often easier and less risky alternatives to achieve your goals.
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Here are some of the reasons that organization might gain from these alliances:
•
To enter new markets with new products and services - A wellestablished clothing manufacturer needs to extend its product range as
consumer preference changes. It forms a strategic alliance with a new,
contemporary brand, so it gains access to their younger demographic, and
they significantly increases production and sales. In return, the partnership
helps
•
the
new
brand
scale
up
quickly.
To access international markets - Two manufacturers of different types of
car part in different countries agree to act as distributors for one-another's
parts. Each can now reach more customers, and the central distribution
ensures that orders comply with each country's safety requirements.
•
To access new distribution channels - A high-end jewelry designer, with
five retail outlets, sets up a strategic alliance with an online retailer known for
its reliability and security. Both companies increase sales as a result: the
designer by reaching a wider audience, and the online retailer by offering a
wider range of attractive online products.
•
To access new technology - A computer manufacturer and a computer game
development company form an alliance in which every computer is shipped
with a full version of one of the gaming company's top-selling games. This is
a selling feature for the computer manufacturer, it guarantees income for the
gaming company, and it creates advertising "buzz" as consumers anticipate
which game their computer will have.
•
To benefit from economies of scale (higher volume/lower cost) - A group
of dairy farmers in a region get together to negotiate with a transport
company to reduce transport costs.
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To reduce the cost and risk of new strategy or product - A pharmaceutical
company forms an alliance with a biotechnology company to provide
resources, and distribute new products once they're ready for market.
•
To reduce the cost and risk of new strategy or product - You developed
an innovative machine that reduces manufacturing waste, and you issue an
exclusive license to the top 20 manufacturers in your industry for the next
two years. These manufacturers benefit from the new technology and reduce
costs, you have guaranteed income, and you build a large potential market at
the end of the two years.
As you can see from these examples, creating a strategic alliance doesn't mean that
you have to increase your own size. And it helps reduce risk while you assess the
potential of new markets, products, or channels.
There also are disadvantages - you give up a portion both of control and reward,
reduce the flexibility of all parties, invest significant time and resources in the
alliance, and risk depending too much on your partner. Clearly, therefore, alliances
need to be evaluated carefully before you commit to them.
9.6.2 How Are Strategic Alliances Formed?
The big question that many people have about strategic alliances is how they are
different from simply using a supplier on a transaction-by-transaction basis. To find
the answer, look at the stages in growing a transactional relationship to become
more strategic and beneficial:
•
Vendors - You have short-term, contract-driven relationships with a variety
of suppliers.
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Preferred suppliers - You move toward longer-term relationships, and you
begin to form trust. You may have joint operations that focus on quality, and
you may be able to influence the development of suppliers' new products.
•
Alliance - You both have a mutual advantage in these relationships as well as
high levels of trust. The focus, however, remains on adding value
independently, while you work cooperatively and exchange ideas.
•
Strategic alliance - The business relationship becomes strategic when there's
a level of mutual dependency, and when the alliance itself is what creates
increased capabilities and opportunities.
Strategic alliances often allow a company to increase its scale, scope, and/or
capacity with reduced risk and great potential benefit. Whether you want to speed
up your entry into a new market, increase the range of products you sell, reduce
costs, increase sales, or otherwise improve your competitive position, a strategic
alliance is often the fastest and most economical way to achieve this.
By setting up a mutually beneficial relationship, and still keeping your company's
independence, you can often create a win-win situation that can be managed with
great success. You need to plan thoroughly and choose your alliance partners well.
However, if you follow a clear plan and fully document how you'll manage the
process, you can create a strategic alliance that fits your business profile and helps
you achieve your growth goals.
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Chapter 10:
Strategy Evaluation
Dr. Sackour_2018
10.1 Introduction?
10.2 The Process of Strategy
Evaluation
10.3 Evaluation Approaches,
Purposes,
Methods and Designs
10.4 Strategy Evaluation Criteria
10.5 An Evaluation Case
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10.1 Introduction
Strategy can neither be formulated nor adjusted to changing circumstances
without a process of strategy evaluation.
Whether performed by an
individual or as part of an organizational review procedure, strategy evaluation
forms an essential step in the process of guiding an enterprise.
For many executives strategy evaluation is simply an appraisal of how well a
business performs. Has it grown? Is the profit rate normal or better? If the
answers to these questions are affirmative, it is argued that the firm's strategy must
be sound. Despite its unassailable simplicity, this line of reasoning misses the
whole point of strategy—that the critical factors determining the quality of longterm results are often not directly observable or simply measured, and that by the
time strategic opportunities or threats do directly affect operating results, it may
well be too late for an effective response.
Thus, strategy evaluation is an
attempt to look beyond the obvious facts regarding the short-term health of a
business and appraise instead those more fundamental
factors and trends that
govern success in the chosen field of endeavour.
11.2 The Process of Strategy Evaluation
Strategy evaluation is the appraisal of plans and the results of plans that centrally
concern or affect the basic mission of an enterprise.
Its special focus is the
separation between obvious current operating results and the factors that underlie
success or failure in the chosen domain of activity. Its result is the rejection,
modification, or ratification of existing strategies and plans.
As process, strategy evaluation is the outcome of activities and events that are
strongly shaped by the firm's control and reward systems, its information and
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planning systems, its structure, and its history and particular culture. Thus, its
performance is, in practice, tied more directly to the quality of the firm's strategic
management than to any particular analytical scheme. In particular, organizing
major units around the primary strategic tasks and making the extra effort required
to incorporate measures of strategic success in the control system may play vital
roles in facilitating strategy evaluation within the firm.
Strategy evaluation can take place as an abstract analytic task, perhaps performed
by consultants. But most often it is an integral part of an organization's processes
of planning, review, and control.
In some organizations, evaluation is informal,
only occasional, brief, and cursory. Others have created elaborate systems
containing formal periodic strategy review sessions. In either case, the quality
of strategy evaluation and, ultimately, the quality of corporate performance, will be
determined more by the organization's capacity for self-appraisal and learning than
by the particular analytic technique employed.
In most firms comprehensive strategy evaluation is infrequent and, if it
occurs, is normally triggered by a change in leadership or financial performance.
The fact that comprehensive strategy evaluation is neither a regular event nor part
of a formal system tends to be deplored by some theorists, but there are several
good reasons for this state of affairs. Most obviously, any
activity that becomes an annual procedure is bound to become more automatic.
While evaluating strategy on an annual basis might lead to some sorts of
efficiencies in data collection and analysis, it would also tend to strongly channel
the types of questions asked and inhibit broad-ranging reflection.
10.3 Evaluation Approaches, Purposes, Methods and Designs
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A useful way of looking at evaluation is to distinguish between approaches,
purposes, methods and designs. It can become particularly confusing if people
having a discussion about evaluation are talking at different conceptual levels. For
example, a discussion about what should be done in an evaluation where one
participant is talking about an approach, e.g. empowerment evaluation; another
about a purpose of evaluation, e.g. outcome evaluation; a third about a method –
e.g. key informant interviews.
10.3.1 Evaluation Approaches
An evaluation approach is a general way of looking at or conceptualising
evaluation, which often incorporates a philosophy and a set of values.
There are many evaluation approaches such as:
•
Utilisation-focused evaluation – determines methods on the basis of
what is going to be most useful to different audiences (Patton 1986).
•
Stakeholder evaluation – looks at the differing perspectives of all of a
programme’s stakeholders (those who have an interest in it) (Greene
1988).
•
Goal-free evaluation – in which the evaluator’s task is to examine all of
the outcomes of a programme, not just its formal outcomes as identified
in its objectives (Scriven 1972).
•
Strategic evaluation – emphasises that evaluation design decisions
should be driven by the strategic value of the information they will
provide for solving problems (Duignan 1997).
10.3.2 Evaluation Purposes
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There are various ways of describing various purposes of evaluation activity, e.g.
design, developmental, formative, implementation, process, impact, and outcome.
The evaluation purpose is best understood as identifying what evaluation activity is
going to be used for. Recent years have seen evaluation move to develop types of
evaluation that are of use right across a programme lifecycle. It should be noted that
any particular evaluation activity can have more than one purpose.
The range of evaluation terms are used in various ways in the evaluation literature.
One way of defining them is as follows:
•
Design, developmental, formative, implementation – evaluative activity
designed to improve the design, development, formation and
implementation of a programme.
•
Process – evaluation to describe the process of a programme. Because
the term process could conceivably cover all of a programme from its
inception to its outcomes, it is conceptually useful to limit the term
process evaluation to activity describing the programme during the
course of the programme, i.e. once it has been initially implemented.
•
Impact, outcome and summative – looking at the impact and outcome of
a programme, and (in the case of summative, making an overall
evaluative judgment about the worth of a programme).
10.3.3 Evaluation Methods
In addition to evaluation purposes there are evaluation methods. These are the
specific research and related methods which evaluators use in their day-to-day
work. Evaluators will draw on any method that can assist in answering the
questions that are being asked in an evaluation. In the past these tended to be
methods originating from the physical sciences, but now they also draw extensively
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on methods developed in the social and organisational sciences and the humanities.
The following are some evaluation methods:
•
consultation
•
literature review (prospective evaluation synthesis)
•
evaluative review of lessons from other existing programmes
•
evaluative goal and objective setting critique
•
archival, administrative /routine records collection
•
observation and environmental audit
•
document analysis
•
interviews: key informant / participant
•
surveys, questionnaires, feedback sheets
•
focus groups
10.3.4 Evaluation Design
Evaluation design are the way in which the evaluation ingredients – approach,
purposes and methods – are put together into the final evaluation in an attempt to
answer a set of evaluation questions. Evaluation design will indicate the overall
evaluation approach, the mix of formative, process and outcome evaluation it is
planned to carry out in the evaluation and the methods and analysis to be used. If
there is to be an outcome evaluation within the evaluation, the design will specify
which of the many types of outcome design are to be used.
There are many different types of outcome design which can be used and which
often require considerable statistical and other analytical sophistication to deal with.
Designs include: non-intervention control group design with pre-test and post-test;
cohort designs in formal and informal institutions with cyclical turnover; post-test-
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only design with predicted higher-order interaction; and regression-discontinuity
design. The classic reference to these designs is Cook and Campbell (1979).
10.4 Strategy Evaluation Criteria
The time required to develop resources is so extended, and the timescale of
opportunities is so brief and fleeting, that a company which has not carefully
delineated and appraised its strategy is adrift in white water. This underlines the
importance of strategy evaluation. The adequacy of a strategy may be evaluated
using the following criteria:
A.
B.
C.
D.
E.
F.
G.
A.
Suitability Is there a sustainable advantage?
Validity Are the assumptions realistic?
Feasibility Do we have the skills, resources, and commitments?
Internal consistency Does the strategy hang together?
Vulnerability What are the risks and contingencies?
Workability Can we retain our flexibility?
Appropriate time horizon.
Suitability Strategy should offer some sort of competitive advantage. In other
words, strategy should lead to a future advantage or an adaptation to forces eroding
current competitive advantage. The following steps may be followed to judge the
competitive advantage a strategy may provide: (a) review the potential threats and
opportunities to the business, (b) assess each option in light of the capabilities of the
business, (c) anticipate the likely competitive response to each option, and (d)
modify or eliminate unsuitable options.
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Validity (Consistent with the Environment) Strategy should be consistent
with the assumptions about the external product/ market environment. At a time
when more and more women are seeking jobs, a strategy assuming traditional roles
for women (i.e., raising children and staying home) would be inconsistent with the
environment.
C.
Feasibility (Appropriateness in Light of Available Resources) Money,
competence, and physical facilities are the critical resources a manager should be
aware of in finalizing strategy. A resource may be examined in two different ways:
as a constraint limiting the achievement of goals and as an opportunity to be
exploited as the basis for strategy. It is desirable for a strategist to make correct
estimates of resources available without being excessively optimistic about them.
Further, even if resources are available in the corporation, a particular
product/market group may not be able to lay claim to them. Alternatively, resources
currently available to a product/market group may be transferred to another group if
the SBU strategy deems it necessary.
D.
Internal Consistency Strategy should be in tune with the different policies of
the corporation, the SBU, and the product/market arena. For example, if the
corporation decided to limit the government business of any unit to 40 percent of
total sales, a product/ market strategy emphasizing greater than 40 percent reliance
on the government market would be internally inconsistent.
E.
Vulnerability (Satisfactory Degree of Risk) The degree of risk may be
determined on the basis of the perspectives of the strategy and available resources.
A pertinent question here is: Will the resources be available as planned in
appropriate quantities and for as long as it is necessary to implement the strategy?
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The overall proportion of resources committed to a venture becomes a factor to be
reckoned with: the greater these quantities, the greater the degree of risk.
F.
Workability The workability of a strategy should be realistically evaluated
with quantitative data. Sometimes, however, it may be difficult to undertake such
objective analysis. In that case, other indications may be used to assess the
contributions of a strategy. One such indication could be the degree of consensus
among key executives about the viability of the strategy. Identifying ahead of time
alternate strategies for achieving the goal is another indication of the workability of
a strategy. Finally, establishing resource requirements in advance, which eliminates
the need to institute crash programs of cost reduction or to seek reduction in
planned programs, also substantiates the workability of the strategy.
G.
Appropriate Time Horizon A viable strategy has a time frame for its
realization. The time horizon of a strategy should allow implementation without
creating havoc in the organization or missing market availability. For example, in
introducing a new product to the market, enough time should be allotted for market
testing, training of salespeople, and so on. But the time frame should not be so long
that a competitor can enter the market first and skim the cream off the top.
11.5 An Evaluation Case
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Educational Activity: Who is the Evaluation for?
What do we mean by describing an educational experience as effective? From
whose point of view is it effective?
The decision about effectiveness might be from several different angles. Evaluation,
in general, is the process of finding out how effective or useful some activity is.
Obviously the decision about how valuable something is depends on the
perspectives and vested interests that various stakeholders have, and final decisions
about effectiveness can vary quite markedly.
It is very important to ask who the evaluation is for. There are many stakeholders in
the planning of university offerings and a variety of information may be sought. In
educational innovations, there are several stakeholders. In Table 1.2 we have listed
a range of possible stakeholders, and some of the interests they might have in an
educational activity, whether this is an innovation in the curriculum or the
continuation of existing practice. Each participant in an evaluation study in this
project should scan the following Table to see which stakeholders, other than
teachers and students, need to be considered, and what implications that has for the
information you will seek to gather.
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Table. Description of various possible stakeholders in the types of evaluation
studies.
Stakeholder
Examples of the vested interest of each stakeholder
Teachers
Professional satisfaction. Keeping a job.
Students
Learning something perceived to have value.
Getting qualifications that can lead to employment.
Subject and course
coordinators
Ensuring that the students' learning meets some
quality assurance standards.
Faculty deans
Capacity to provide for increasing numbers of
students.
Meeting professional standards of the discipline area.
Members of the
university's
chancellery
Links to the university's strategic mission.
Cost-effectiveness, especially in the provision of
technology.
Funding body
Assuring that the product is congruent with the grant
application.
Employers
A focus on graduate capabilities rather than all the
intervening experiences.
Professional
accrediting bodies
Standards relating to what skills and knowledge
graduates require in particular professions for the 21st
century.
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Chapter 11:
Globalization
Strategies
11.1 Introduction
11.2 What Is Different about
International Marketing
11.3 Objectives of Market Entry
11.4 Modes of Market Entry
11.1 Introduction
The process of penetrating and then developing an international market is a difficult
one. In fundamental terms, entering a new country-market is very like a start-up
situation, with no sales, no marketing infrastructure in place, and little or no
knowledge of the market. Despite this, companies usually treat this situation as if it
were an extension of their business, a source of incremental revenues for existing
products and services. Two aspects of the typical approach are particularly striking.
First, companies often pursue this new business opportunity with a focus on
minimizing risk and investment—the complete opposite of the approach usually
advocated for genuine start-up situations.
Second, from a marketing perspective, many companies break the founding
principle of marketing—that a firm should start by analyzing the market, and then,
and only then, decide on its offer in terms of products, services, and marketing
programs.
11.2 What Is Different about International Marketing?
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Most executives are quite clear that international marketing is different from homecountry marketing, and most multinational companies insist that their senior
managers have international experience on their businesses. Despite this pragmatic
recognition of the uniqueness of the international marketplace, there has been little
agreement over the exact nature of this distinctiveness. The differences between
domestic and international marketing are differences of degree rather than
underlying differences of kind. In fact, there are certain distinctive characteristics in
international operations that, while they may not establish international marketing
as a separate theoretical subdomain of marketing, nevertheless have a great bearing
on managerial decisions. They are:
1. A Context of Rapid Business Growth and Organizational Learning
Penetration of a foreign market is a zero-base process. At the point of market entry,
the foreign entrant has no existing business and little or no market knowledge,
particularly with regard to the managerial competence necessary to operate in the
new market environment. During the years after market entry, therefore, the rate of
change in the country-specific marketing capability of the firm is likely to be
greater than the rate of change in the market environment, and firm effects may
dominate market effects in shaping strategy. This is particularly important given the
business context, in which the generation of new business is of prime importance—
rather than efficiency in managing a relatively stable business. This usually results
in (a) entering the market via a partnership with a local distributor or other
marketing agent rather than via a directly controlled marketing unit and (b) a
relatively rapid sequence of changes to the marketing strategy (such as new product
introductions or expansion of distribution) or to the marketing organization (e.g.,
taking over marketing responsibility from the local distributor).
2. The Hierarchical Nature of Decisions
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International market situations are multilevel in their decision focus, with a
hierarchy of decisions from country assessment and performance measurement
decisions through to more traditional marketing mix allocations and programs.
Thus, an executive responsible for a country in which the firm participates only for
revenue generation and not for production (a common situation) is simultaneously
managing country-level trends in the economy or government, and marketing
decisions such as the product range or price level. In the domestic market, by
contrast, these decision levels are addressed by separate specialists.
3.
Managing A Multimarket Network
From the time a company enters its second country-market, it will inevitably be
influenced by its previous experience. The greater the number of national markets
in which a company participates, the more likely it is to seek to manage them as an
aggregated network rather than as independent units. Marketing strategy decisions
in one country-market may in this case be made against extra-market criteria. For
example, price levels may be set to minimize the difference among markets and to
maintain a price corridor rather than purely to reflect local market conditions.
Similarly, a multinational company may subsidize price levels in one market for
strategic reasons while recovering that loss in another market. This ability to
leverage a global network is sometimes described as “the global chess game,” and it
is increasingly regarded as one of the key advantages enjoyed by a global firm
relative to local players, partly because of the increasing globalization of firms and
their consequent opportunities to integrate national operations. In practice, this
frequently results in asymmetric competition in any single market, with different
companies pursuing different objectives and setting different performance
standards. As discussed later in this session, it is possible that one company may be
participating in the market simply to learn, and it may therefore tolerate low
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profitability, while others are pursuing more conventional profit maximization
goals.
4. Co-location of Strategic Marketing and Distribution Functions
A national distribution channel for an international corporation is usually
responsible not just for the traditional distribution functions, but it is the de facto
branch of the company in that country with an exclusive agency for the territory and
responsibility for marketing strategy. The distribution unit in the country-market,
whether an independent organization or a wholly-owned subsidiary, has to manage
a strategy for growth, and it will therefore be judged on organizational criteria
including feasibility, level of desired risk, supportability, and control issues. By
contrast, distribution management in domestic markets is largely concerned with the
implementation of preexisting marketing strategies such as communication
platforms and target customer selection, and so the distributor is judged against
efficiency or cost-minimization criteria. Although some more-established firms
manage this trade-off with considerable sophistication, all too often the delegation
of marketing strategy to what is essentially a distribution organization results in
underperformance, as nobody is in fact formulating a marketing strategy.
In practice, these unique characteristics mean that marketing strategy in the
international arena changes rapidly as the business grows or fails to grow.
Importantly, it is driven not only by market characteristics (the basis for marketing
strategy in the pure or theoretical sense), but also by organizational development, as
the economics and knowledge of the local marketing unit develop.
11.3 Objectives of Market Entry
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Companies enter international markets for varying reasons, and these different
objectives at the time of entry should produce different strategies, performance
goals, and even forms of market participation. Yet, companies frequently follow a
standard market entry and development strategy. The most common, which will be
described in the following section, is sometimes referred to as the “increasing
commitment” pattern of market penetration, in which market entry is via an
independent local distributor or partner with a later switch to a directly controlled
subsidiary. This approach results from an objective of building a business in the
country-market as quickly as possible but nevertheless with a degree of patience
produced by the initial desire to minimize risk and by the need to learn about the
country and market from a low base of knowledge. These might be described as
straightforward financial objectives that are oriented around long-run profit
maximization in the country, so this internationalization strategy could be described
as the default option.
The fundamental reason for entering a new market has to be potential demand, of
course, but nevertheless it is common to observe other factors driving investment
and performance measurement decisions, such as:
A, Learning in Lead Markets
In some circumstances, a company might undertake a foreign market entry not for
solely financial reasons, but to learn. For example, the white goods division of Koc,
the Turkish conglomerate, entered Germany, regarded as the world’s leading
market for dishwashers, refrigerators, freezers, and washing machines both in terms
of consumer sophistication and product specification. In doing so, it recognized that
its unknown brand would struggle to gain much market share in this fiercely
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competitive market. However, Koc took the view that, as an aspiring global
company, it would undoubtedly benefit from participating in the world’s lead
market and that its own product design and marketing would improve and enable it
to perform better around the world. In most sectors, participation in the “lead
market” would be a prerequisite for qualifying as a global leader, even if profits in
that lead market were low. The lead market will vary by sector: the United States
for software, Japan for consumer electronics and telecommunications, France or
Italy for fashion, and so on.
The important point about such an objective for market entry is that it will change
the calculus of the market entry mode decision. If a company is to maximize
learning from a lead market, for example, it will need to participate with its own
subsidiary and a cadre of its own executives. Learning indirectly, via a local
distributor or other partner, is obviously less effective and will contribute less to the
company’s development as a global player, even if short-term profitability is
superior because of the lower investment required.
B, Competitive Attack or Defence
In some situations, market entry is prompted not by some attractive characteristics
of the country identified in a market assessment exercise, but as a reaction to a
competitor’s move. The most common scenario is market entry as a follower move,
when a company enters the market simply because a major competitor has done so.
This is obviously driven by the belief that the competitor would gain a significant
advantage if it were allowed to operate alone in that market, and so it is most
common in concentrated or even duopolistic industries. Another frequent scenario
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is “offense as defense,” in which a company enters the home market of a
competitor—usually in retaliation for an earlier entry into its own domestic market.
In this case, the objective is also to force the competitor to allocate increased
resources to an intensified level of competition. In both cases, a company will have
to adapt its strategies to the particular strategic stakes: rather than focusing on
market development, the firm will set market share objectives and be prepared to
accept lower levels of profitability and higher levels of marketing expenditure. This
requires different performance standards and budgets from the usual scenario of
low-risk entry and long-run development, and the company’s control system must
have sufficient flexibility to adapt to this. The overriding competitive objective
should also be taken into account when considering whether and how to participate
in the market with a local distributor or partner. Certainly, the low-intensity entry
modes, such as import agents and trading houses, would be inappropriate unless the
local partner will accept the lower profit expectations.
C, Scale Economies or Marketing Leverage
A number of objectives result from internationalization undertaken as what is
sometimes described as a “replication strategy,” in which a company seeks a larger
market arena in which to exploit an advantage. In many manufacturing industries,
for example, internationalization can help the company achieve greater economies
of scale, particularly for companies from smaller domestic country-markets. In
other cases, a company may seek to exploit a distinctive and differentiating asset
(often protected as intellectual property), such as a brand, service model, or
patented product. In both cases, the emphasis is on “more of the same,” with
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relatively little adaptation to local markets, which would undermine scale
economies or diminish the returns from replication of the winning model. To
achieve either of these objectives, a company must retain some control, so it may
enter markets with relatively high-intensity modes, such as joint ventures. In
particular, either franchising or licensing are business models naturally suited for
the rapid replication of businesses through expansion of units since both are
centered on protected and predefined assets.
Apart from these varied marketing objectives, it is also common for governments to
“incentivize” their country’s companies to export, in which case the company may
enter markets it would otherwise not have tackled. In summary, given the rapid
business evolution that has been identified as one of the distinctive characteristics
of international markets, it is reasonable to suppose that, for most companies,
international operations will consist of a patchwork of country-market operations
that are pursuing different objectives at any one time. This, in turn, would suggest
that most companies would adopt different entry modes for different markets.
11.4 Modes of Market Entry
The central managerial trade-off between the alternative modes of market entry is
that between risk and control. On the one hand, low intensity modes of entry
minimize risk. Thus, contracting with a local distributor requires no investment in
the country-market in the form of offices, distribution facilities, sales personnel, or
marketing campaigns. Under the normal arrangement, whereby the distributor takes
title to the goods (i.e., buys them) as they leave the production facility of the
international company, there is not even a credit risk, assuming that the distributor
has offered a letter of credit from its bank. This arrangement also minimizes
control, however, since the international company will have little or no involvement
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in most elements of the marketing plan, including how much to spend on marketing,
distribution arrangements, and service standards. In particular, it should be noted
here that effective control over marketing operations is impossible without timely
and accurate market information, such as customer behavior, market shares, price
levels, and so on. In many cases, low-intensity modes of market participation cut
off the international firm from this information, since third-party distributors or
agents jealously guard the identity and buying patterns of their customers for fear of
disintermediation. Such control can only be obtained via higher-intensity modes of
market participation, involving investments in local executives, distribution, and
marketing programs. This is truly a trade-off in that companies cannot have it all,
but must find compromise solutions. The fact is that control only comes from
involvement, and involvement only comes from investment.
Another vital distinction here is between financial risk and marketing risk. It is
financial risk that is usually the major consideration at the point of market entry,
and it is financial risk that is minimized by low-intensity modes of market
participation. However, this risk comes at the price of low control over business
strategy, so that in fact marketing risk is maximized, with a local partner making all
the important marketing decisions. It is the desire for greater control over the
business (i.e., to minimize marketing risk) that explains the usual evolutionary
pattern of increasing commitment.
1. Export/Import and Trading Companies
Serving an international market through export/import agents, or trading companies
such as the Japanese trading houses or the former British hongs in Hong Kong, is
attractive in that it offers both low financial risk and access to substantial local
operating knowledge. It is particularly suitable for companies with little
international experience since almost all international operating functions are borne
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by the agent, including the costly and time-consuming requirements such as
customs clearance and invoice and collection. However, in addition to the low level
of control, a couple of additional drawbacks should be noted. First, agents such as
these operate on the basis of economies of scope, seeking to act as intermediaries
for as many vendors as possible—they are servants of many masters. In many cases,
therefore, the international vendor will be only a small proportion of the agent’s
business, so the vendor may end up feeling underserved by the agent, who, if acting
rationally, will at any time devote the greatest attention to the vendor that offers the
greatest total margin in a given period. Second, agents often operate on a
commission basis, and they do not actually buy the goods from the international
vendor, so there is a credit and cash flow risk that is not present in distributor
arrangements.
2. “Piggybacking”
Although such arrangements are rarely featured in international business texts,
many companies begin their internationalization opportunistically through a variety
of arrangements that may be described as “piggybacking,” because they all involve
taking advantage of a channel to an international market rather than selecting the
country-market in a more conventional manner. For example, a firm may be offered
some spare capacity on a ship or plane by a business partner, or it may find that a
domestic distributor is already serving an international market and so grants a
foreign distribution license that requires nothing more than an increase in domestic
sales. An example of this is the Italian rice firm F&P Gruppo, owners of the leading
Gallo brand, which entered Poland via their Argentinean subsidiary rather than
direct from Italy, thus leading to the rather bizarre situation of packets of rice with
Spanish-language packaging covered in stickers in Polish. The reason, it transpires,
was that the Argentinean air force was importing freight from Poland via regular
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flights, but it was sending over empty aircraft on the outward leg, a source of export
distribution capacity that was bought by a consortium of local food companies.
3. Franchising
Franchising is an underexplored entry mode in international markets, but it has been
widely used as a rapid method of expansion within major developed markets in
North America and Western Europe, most notably by fast food chains, consumer
service businesses such as hotel or car rental, and business services. At heart,
franchising is suitable for replication of a business model or format, such as a fastfood retail format and menu. Since the business format and, frequently, the
operating models and guidelines are fixed, franchising is limited in its ability to
adapt, a key consideration in employing this entry mode when entering new
country-markets. There are two arguments to counter this. First, the major
franchisers are increasingly demonstrating an ability to adapt their offering to suit
local tastes. McDonald’s, for example, is far from being a global seller of
American-style burgers, but it offers considerably different menus in different
countries and even different regions of countries.6 In such cases, the format and
perhaps the brand is internationally consistent, but certain customer-facing elements
such as service personnel or individual menu choices can be tailored to local tastes.
Secondly, it must be recognized that there are product-markets in which customer
tastes are quite similar across countries. A business installing and maintaining
swimming pools, for example, is a prime candidate for franchising, as sourcing and
operations remain key success factors and are more or less universal. This is an
example of a business, like fast food, that is not culture bound and in which
marketing knowledge (i.e., the product- or service-specific knowledge involved in
marketing this particular offering) is at least as important as local market
knowledge (i.e., the knowledge required to operate successfully in a particular
territory). It is also important to note that in such businesses, the local service
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personnel are a vital differentiating factor, and these will obviously still be local in
orientation even if they operate within an internationally consistent business format.
The main drawback of franchising is the difficulty of adapting the franchised asset
or brand to local market tastes—even experienced corporations like McDonald’s or
Marriott, which have managed to thrive on this trade-off as discussed above, have
taken several decades and some false starts to get to this point of advanced practice.
A key indicator that franchising carries this constraint is the fact that marketing
budgets at local levels are usually restricted to short-term promotions rather than
market development. This is consistent with the concept that franchising is a rapid
replication strategy.
4. Licensing
Licensing is a common method of international market entry for companies with a
distinctive and legally protected asset, which is a key differentiating element in their
marketing offer. This might include a brand name, a technology or product design,
or a manufacturing or service operating process. Licensing is a practice not
restricted to international markets. Disney, for example, will license its characters to
manufacturers and marketers in categories such as toys and apparel even in its
domestic market while it focuses its own efforts on its core competencies of media
production and distribution. But it offers a particularly effective way of entering
foreign markets because it can offer simultaneously both a low-intensity (and
therefore low risk) mode of market participation and adaptation of product to local
markets. Continuing with Disney as an example, its many licensing arrangements in
China allow its characters to adorn apparel or toys suited to local taste in terms of
color, styling, or materials. This is because, as is usual in licensing agreements, the
local licensee has considerable autonomy in designing the products into which it
incorporates the licensed characters. The other major advantage of licensing is that,
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despite the low level of local involvement required of the international licensor, the
business is essentially local and is in the shape of the local business that holds the
license. As a result, import barriers such as regulation or tariffs do not apply.
As always, there are disadvantages, and two in particular should be factored into
any decision on licensing.
First, although it facilitates the creation of localized product, licensing is
characterized by very low levels of marketing control. The licensee usually has to
obtain approval from the international vendor for product design and specification,
but it usually enjoys almost total autonomy over every other aspect of the marketing
program (even if the contract includes constraints such as minimum price levels or
promotional budgets). This is because the licensee is not a representative of the
international vendor and, compared to a distributor or franchisee, is much more of
an independent business that licenses only one specific and closely defined aspect
of the marketing offer rather than acting as the de facto marketing arm of the
international vendor.
Second, and perhaps most importantly, licensing runs the risk of creating future
local competitors. This is particularly true in technology businesses, in which a
design or process is licensed to a local business, thus revealing “secrets,” in the
shape of intellectual property that would otherwise not be available to that local
business. In the worst case scenario, the local licensee can end up breaking away
from the international licensor and quite deliberately stealing or imitating the
technology. This might arise from malicious intent or simply a breakdown in
relations, as is not uncommon between an international company and its local
partner. Even in a best case scenario, the local licensee will certainly benefit from
accelerated learning related to the technology or product category—this is
inevitable since the international company must by definition have a superior asset
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if there is a market for licensing it in the country. Over time, even absent of
malicious intent, the local firm is likely to develop into a position in which it can
launch its own rival business. Participation in international markets via licensing is
therefore best suited to firms with a continuous stream of technological innovation
because those corporations will be able to move on to new products or services that
retain a competitive advantage over “imitator” ex-licensees.
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Chapter 12:
Society and Businesses
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12.1 The impact of business
activity on society
12.2 Corporate Governance
12.3 Social Responsibility
13.4 Business Ethics
12.1 The
impact of business activity on society
The great problem for all governments is this: how can the benefits of business
activity be encouraged whilst controlling or outlawing the undesirable effects? The
answer to this problem is often for governments to use changes in the law to control
undesirable business activity whilst giving support to firms engaging in desirable
activity
The following table outlines some of the benefits of business activity as well as
some of the possible undesirable effects. This will help us to understand why
governments usually take steps to control business activity in important ways.
Possible benefits to society of
business activity
11II
Production of useful goods and
Possible undesirable effects of
business activity
11II
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services which people wish to buy
11II Creation of lobs and incomes. These
increase workers' living standards
11II Introduction of new products and
processes that widen product range
and reduce costs of production
11II Tax payments made by business to
governments help to finance essential
public services
11II By producing goods for export,
businesses earn foreign currency that
the country can spend on imports
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decisions to locate in cheap but
attractive and unspoilt areas
11II Managers aiming to lower costs might
offer very low wages with poor and
unsafe working conditions
11II Some production methods lead to
serious pollution problems
11II Certain goods made by industry
are dangerous or can add to the
pollution problem, e.g. fast cars
11II Profit motive can lead firms to merge
and this can lead to monopoly control
with less consumer choice
11II Advertising is very powerful and can
be used to give a misleading image
or incorrect information to persuade
consumers to buy
Look again at the list of undesirable effects - for all of these reasons governments in
most countries have decided to control business decision malting. This control is
thought to be for the good of consumers, workers, local residents and the whole
community - the STAKEHOLDERS in the business.
12.2 Corporate governance
Corporate failures and widespread dissatisfaction with the way many corporate
functions have led to the realization, globally, of the need to put in place a proper
system for corporate governance. Corporate governance is concerned with holding
the balance between economic and social goals and between individual and
communal goals. The governance framework is there to encourage the efficient use
of resources and equally to require accountability for the stewardship of those
resources.
The aim is to align as nearly as possible the interest of individuals, corporations,
and society. The incentive to corporations and to those who own and manage them
to adopt internationally accepted governance standards is that these standards will
help them to achieve their corporate aims and to attract investment. The incentive
for their adoption by states is that these standards will strengthen the economy and
discourage fraud and mismanagement.
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RELEVANCE
At least three reasons have triggered off concern in corporate governance.
• Since 1991, the country has moved into liberalized economy and one of the
victims of the market-based economy is transparent fair business practice. Several
instances of mismanagement have been
alleged, with some well-known and senior executive being hauled up for nonperformance and /or non-compliance with legal requirements.
• Both domestic as well as foreign investors are becoming more demanding in their
approach towards the companies in which they have invested their funds. They seek
information and want to influence decisions.
• Interests of non-promoter shareholder and those of small investors are
increasingly being undermined. Several MNCs have sought to set up 100 percent
subsidiaries and transfer their businesses to them .In many cases, there was no
thought of consultation with non-promoter shareholders. In this context, some
norms of behavior to ensure responsive behavior are of great help. Hence, corporate
governance.
FOCUS
Corporate governance is concerned with the values, vision and visibility. It is about
the value orientation of the organization, ethical norms for its performance, the
direction of development and social accomplishment of the organization and the
visibility of its performance and practices. Corporate management is concerned
with the efficiency of the resources use, value addition and wealth creation within
the broad parameters of the corporate philosophy established by corporate
governance.
IMPORTANCE
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• Studies of firms and abroad have shown that markets and investors take notice of
well-managed companies, respond positively to them, and reward such companies,
with higher valuations. In other words they have a system of good corporate
governance.
• Strong corporate governance is indispensable to resilient and vibrant capital
markets and is an important instrument of investor protection.
• Corporate governance prevents insider trading.
• Under corporate governance, corporates are expected to disseminate the material
price sensitive information in a timely and proper manner and also ensures that till
such information is made public, insiders abstain from transacting in the securities
of the company.
• The principle should be ‘disclose or desist’. Good corporate governance, besides
protecting the interests of shareholders and all other stakeholders, contributes to the
efficiency of a business enterprise, to the creation of wealth and to the country’s
economy.
• Good corporate governance is considered vital from medium and long term
perspectives to enable firms to compete internationally in sustained way and make
them, not only to improve standard of living materially but also to enhance social
cohesion.
PRE-REQUISITES
A system of good corporate governance requires the following:
• A proper system consisting of clearly defined and adequate structure of roles,
authority and responsibility.
• Vision, principles and norms, which indicate development path, normative
considerations, and guidelines and norms for performance.
• A proper system for guiding, monitoring, reporting and control.
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12.3 SOCIAL RESPONSIBILTY
Social responsibility is the obligation of decision-makers to take actions, which
protect and improve the welfare of society as a whole along with their own
interests. Every decision the businessman takes and every action he contemplates
have social implications.
Be it deciding on diversification, expansion, opening of a new branch, and closure
of an existing branch or replacement of men by machines, the society is affected in
one way or the other. Whether the issue is significant or not, the businessman
should keep his social obligation in mind before contemplating any action.
12.3.1 ARGUMENTS FOR SOCIAL RESPONSIBILITY
• Business has to respond to the needs and expectations of society.
• Improvement of the social environment benefits both society and business.
• Social responsibility discourages additional governmental regulation and
intervention.
• Business has a great deal of power, which should be accompanied by an equal
amount of responsibility.
• Internal activities of the enterprise have an impact on the external environment.
• The concept of social responsibility protects interests of stockholders.
• Social responsibility creates a favorable public image.
• Business has the resources to solve some of society’s problems.
• It is better to prevent social problems through business involvement than to cure
them.
12.3.2 ARGUMENTS AGAINST SOCIAL RESPONBILITY
• Social responsibilities could reduce economic efficiency.
• Social responsibility would create excessive costs for business.
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• Weakened international balance of payments
• Business has enough power, and social involvement would further increase its
power and influence.
• Business people lack the social skills necessary to deal with the problems of
society.
• Business is not really accountable to society.
12.3.3 SOCIAL STAKEHOLDERS
Managers, who are concerned about corporate social responsibility, need to identify
various interest groups which may affect the functioning of a business organization
and may be affected by its functioning. Business enterprises are primarily
responsible to six major groups:
• Shareholders
• Employees
• Customers
• Creditors, suppliers and others
• Society and
• Government. These groups are called interest groups or social stakeholders. They
can be affected for better or worse by the business activities of corporations.
12.3.4 SOCIAL RESPONSIVENESS
Social responsiveness (SR) is “the ability of a corporation to relate it operations and
policies to the social environment in ways that are mutually beneficial to the
company and to society”. In other words, it refers to the development of
organizational decision processes whereby managers anticipate, respond to, and
manage areas of social responsibility. The need to measure the social
responsiveness of an organization led to the concept of social audit.
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The social responsiveness of an organization can be measured on the basis of the
following criteria:
• Contributions to charitable and civic projects
• Assisting voluntary social organizations in fund-raising
• Employee involvement in civic activities
• Proper reuse of material
• Equal employment opportunity
• Promotion of minorities
• Direct corporate social responsiveness investment
• Fair treatment of employees
• Fair pay and safe working conditions
• Safe and quality products to consumers
• Pollution avoidance and control
12.4 BUSINESS EHTICS
The two issues - an organization’s social responsibility and responsivenessultimately depend on the ethical standards of mangers. The term ethics commonly
refers to the rules or principles that define right and wrong conduct. Ethics is
defined as the “ discipline dealing with what is good and bad and with moral duty
and obligation”. Business ethics is concerned with truth and justice and has a
variety of aspects such as expectations of society, fair competition, advertising,
public relations, social responsibilities, consumer autonomy, and corporate behavior
in the home country as well as abroad.
12.4.1 TYPES OF BUSINESS ETHICS
Moral management
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Moral management strives to follow ethical principles and precepts, moral mangers
strive for success, but never violate the parameters of ethical standards. They seek
to succeed only within the ideas of fairness, and justice. Moral managers follow the
law not only in letter but also in spirit. The moral management approach is likely to
be in the best interests of the organization, long run.
Amoral management
This approach is neither immoral nor moral. It ignores ethical considerations.
Amoral management is broadly categorized into two types – intentional and
unintentional.
• Intentional amoral managers exclude ethical issues because they think that general
ethical standards are not appropriate to business.
• Unintentional amoral managers do not include ethical concerns because they are
inattentive or insensitive to the moral implications.
Immoral management
Immoral management is synonymous with “unethical” practices in business. This
kind of management not only ignores concerns, it is actively opposed to ethical
behavior.
12.4.2 NEED FOR BUSINESS ETHICS
• Ethics corresponds to basic human needs. It is human trait that man desires to be
ethical, not only in his private life but also in his business. These basic ethical need
compel the organizations to be ethically oriented.
• Values create credibility with public. A company perceived by the public to be
ethically and socially responsive will be honored and respected.
The management has credibility with its employees precisely because it has
credibility with the public.
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• An ethical attitude helps the management make better decisions, because ethics
will force a management to take various aspects- economic, social, and ethical in
making decisions.
• Value driven companies are sure to be successful in the long run, though in the
short run, they may lose money.
• Ethics is important because the government, law and lawyers cannot do
everything to protect society.
12.4.3 ETHICAL GUIDELINES
• Obeying the law: Obedience to the law, preferably both the letter and spirit of the
law.
• Tell the Truth: To build and maintain long-term, trusting and win-win
relationships with relevant stockholders.
• Uphold human dignity: Giving due importance to the element of human dignity
and treating people with respect.
• Adhere to the golden rule: “Do unto others as you would have others do unto
you”
• Allow Room for participation: Soliciting the participation of stakeholders rather
than paternalism. It emphasizes the significance of learning about the needs of
stakeholders.
• Always Act When You Have Responsibility: Managers have the responsibility
of taking action whenever they have the capacity or adequate resources to do so.
12.4.4 TOOLS FOR ETHICAL MANAGEMENT
• Top management commitment: Managers can prove their commitment and
dedication for work and by acting as role models through their own behaviors.
• Codes of Ethics: A formal document that states an organization’s primary values
and the ethical rules it expects employees to follow. The code is helpful in
maintaining ethical behavior among employees.
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• Ethics committees: Appointment of an ethics committee, consisting of internal
and external directors is essential for institutionalizing ethical behavior.
• Ethics Audits: Systematic assessment of conformance to organizational ethical
policies, understanding of those policies, and identification of serious deviations
requiring remedial action.
• Ethics training: Ethical training enables managers to integrate employee behavior
in ethical arena with major organizational goals.
• Ethics Hotline: A special telephone line that enables employees to bypass the
normal chain of command in reporting their experiences, expectations and problem.
The line is usually handled by an executive appointed to help resolve the issues that
are reported.
References for Further Reading
- Some Best Business Books: Strategy
- Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win
with a Capabilities-Driven Strategy, (Harvard Business Review Press, 2011)
- Michael A. Cusumano, Staying Power: Six Enduring Principles for Managing
Strategy and Innovation in an Uncertain World, (Oxford University Press, 2010)
- Richard P. Rumelt, Good Strategy, Bad Strategy: The Difference and Why It
Matters, (Crown Business, 2011)
- Other Books
Ayres, R., Ayres, L. & Rade, I. (2003), The Life Cycle of Copper, Its Co-products
and Byproducts, Kluwer Academic Publishers, Massachusetts.
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Baum, J. & McGahan, A. (2004), Business Strategy over the Industry Lifecycle, JAI
Press, Oxford.
Chandler, A.D., (1962), Strategy and Structure, MIT Press, Cambridge, Mass.
De Wit, B., Meyer, R, (2004), Strategy: Process, Content, Context: An International
Perspective, Third Edition, Thomson Learning: London.
Finaly, P., (2000), Strategic Management: An Introduction to Business and
Corporate Strategy, FT Prentice Hall: London
Goold, M., Campbell, A., Alexander, M, (1994), Corporate-Level Strategy, John
Wiley: London.
Hendrickson, C., Lave, L. & Matthews, S. (2006), Environmental Life Cycle
Assessment of Goods and Services: An Input-output Approach, Future Press,
Washington DC.
Johnson, G., Scholes, K., (2002), Exploring Corporate Strategy: Text and Cases”
Sixth Edition: FT Prentice Hall, London.
Kotler, P. (2003), Marketing Management, Prentice Hall, New Jersey.
Mintzberg, H., (1994,) The Rise and Fall of Strategic Planning, Prentice Hall:
London.
- Michael Porter's key books:
For further reading, the followings are some major books written by M. Porter:
- Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980
- Competitive Advantage: Creating and Sustaining Superior Performance, 1985
- Competition in Global Industries, 1986
- The Competitive Advantage of Nations, 1990
- Electronic Journals:
Learners are encouraged to scan in journals for good-quality articles relevant to
their post-module assignment. For example:
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- Strategic Management Journal
- British Journal of Management
- Sloan Management Review
- Long Range Planning
- Management Decision
- Strategy & Leadership
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