Maria Lopez Dominguez
81782 H
Strategic Management
It is needed some useful definitions since many words related to this topic have
different meanings depending on who is the reader:
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Strategy: is the plan that integrates an organization’s major goals, policies and action
sequences into a cohesive whole. It helps to marshal and allocate an organization’s
resources into a unique and viable posture.
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Objectives (goals): state what is to be achieved and when results are to be accomplished,
but they do not state how the results are to be achieved. All organizations have multiple
goals existing in a complex hierachy. Major goals – the ones which affect the entity’s overall
direction and viability - are called strategic goals.
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Policies: are rules that express the limits within action should occur. They take the form of
contingent decisions for resolving conflicts among specific objectives. For example: “Don’t
exceed three months’ inventory in any item without corporate approval”. These also exist in
a hierarchy throughout the organization.
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Programmes: this specifies the step-by-step sequence of actions necessary to achieve
major objectives. They express how objectives will be achieved within the limits set by
policy.
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Strategic decisions: are those that determine the overall direction of an enterprise. They
shape the true goals of the enterprise and help to describe the broad limits within it
operates.
1. Strategies Versus Tactics
Strategies normally exist at many different levels in any large organization.
Businesses have numerous strategies from corporate levels to department levels within divisions.
The difference between between theses two concepts is that tactics are short-duration, adaptive,
action-interaction realignments, which opposing forces use to accomplish limited goals after their
initial contact. On the other hand, strategy defines a continuining basis for ordering these
adaptations towards more broadly conceived purposes.
2. Effective Strategy
Although each strategic situation is unique, there are somo common criteria that tend
to define a good strategy. Effective strategies should have the following minimum elements:
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Clear, decisive objectives.
Maintaining the initiative.
Concentration.
Flexibility.
Coordinated and commited leadership.
Surprise.
Security.
Maria Lopez Dominguez
81782 H
3. Five P’s for strategy
Five definitions of strategy are presented here -as plan, ploy, pattern, position and
perspectivea-and some of their interrelationships are considered.
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Strategy as plan: strategy is a plan, some sort of consciously intended course of action, a
guideline to deal with a situation. By this definition, strategies have two essential
characteristics: they are made in advance of the actions to which they apply, and they are
developed consciously and purposefully.
As plans, strategies may be general or specific.
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Strategy as ploy: A strategy can also be a ploy, a specific “manoeuvre” intended to outwit
an opponent or competitor.
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Strategy as pattern: we have to consider that defining a strategy as a plan is not enough,
we also need a definition for the resulting behaviour. That is why we can say that strategy is
a pattern since it is like the model in a stream of actions.
The definitions of strategy as plan and pattern can be quiet independent of each other:
plans may go unrealized, while patterns may appear without preconception. For a strategy
to be truly deliberate would seem to be a tall order. Likewise, a truly emergent strategy is
again a tall order, requiring consistency in action without any hint of intention.
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Strategy as position: this is also called environment. According to this definition, strategy
becomes the mediating force between internal (organization) and external context
(environment).
A position can be pre-selected and aspired to through a plan and/or can be reached
through a pattern of behaviour.
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Strategy as perspective: the fifth definition looks inside the organization, indeed inside the
heads of the collective strategist, but up to a broader view. We can define it as a pespective
since its content consisting not just of a chosen position, but of an ingrained way of
perceiving the world.
This definition suggests above all that strategy is a concept, so all are abstractions which
exist only in the minds of interested groups.
The important thing about this definition is that the perspective is shared by the members of
an organization, through their intentions and/or by their actions.
4. Porter’s five model
Porter's 5 forces analysis is a framework for the industry analysis and business
strategy. It determines the competitive intensity and therefore attractiveness of a market.
They consist of those forces close to a company that affect its ability to serve its
customers and make a profit. A change in any of the forces normally requires a company to reassess the marketplace. The overall industry attractiveness does not imply that every firm in the
industry will return the same profitability.
Maria Lopez Dominguez
81782 H
Next, the sketch of the model can be seen:
Figure 1: Porter’s five forces
4.1. Model
The threat of substitute products
The existence of close substitute products increases the propensity of customers to switch to
alternatives in response to price increases (high elasticity of demand).
- buyer propensity to substitute
- relative price performance of substitutes
- buyer switching costs
- perceived level of product differentiation
The threat of the entry of new competitors
Profitable markets that yield high returns will draw firms. This results in many new entrants, which
will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents,
the profit rate will fall towards a competitive level (perfect competition).
- the existence of barriers to entry (patents, rights, etc.)
- economies of product differences
- brand equity
- switching costs or sunk costs
- capital requirements
- access to distribution
- absolute cost advantages
- learning curve advantages
- expected retaliation by incumbents
- government policies
Maria Lopez Dominguez
81782 H
The intensity of competitive rivalry
For most industries, this is the major determinant of the competitiveness of the industry.
Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions
such as innovation, marketing, etc.
- number of competitors
- rate of industry growth
- intermittent industry overcapacity
- exit barriers
- diversity of competitors
- informational complexity and asymmetry
- fixed cost allocation per value added
- level of advertising expense
- Economies of scale
- Sustainable competitive advantage through improvisation
The bargaining power of customers
Also described as the market of outputs. The ability of customers to put the firm under pressure
and it also affects the customer's sensitivity to price changes.
- buyer concentration to firm concentration ratio
- bargaining leverage, particularly in industries with high fixed costs
- buyer volume
- buyer switching costs relative to firm switching costs
- buyer information availability
- ability to backward integrate
- availability of existing substitute products
- buyer price sensitivity
- differential advantage (uniqueness) of industry products
- RFM Analysis
The bargaining power of suppliers
Also described as market of inputs. Suppliers of raw materials, components, and services (such as
expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the
firm, or e.g. charge excessively high prices for unique resources.
- supplier switching costs relative to firm switching costs
- degree of differentiation of inputs
- presence of substitute inputs
- supplier concentration to firm concentration ratio
- threat of forward integration by suppliers relative to the threat of backward integration by
firms
- cost of inputs relative to selling price of the product
This 5 forces analysis is just one part of the complete Porter strategic models. The other elements
are the value chain and the generic strategies.
Maria Lopez Dominguez
81782 H
5. Porter generic strategies
This strategies achieve and maintain competitive advantage. The main three Porter’s
strategies are: cost leadership, differentiation and market segmentation (or focus).
Figure 2:Porter’s Generic Strategies
Porter’s explanation of this is that firms with high market share were successful
because they pursued a cost leadership strategy. On the other hand, firms with low market share
were successful because they used market segmentation to focus on a small but profitable market
niche. Firms in the middle were less profitable because they did not have a viable generic strategy.
Combining multiple strategies is not always successful. A distinction has been made
between cost leadership, that is, low cost strategies, and best cost strategies.
5.1. Cost Leadership Strategy
This strategy emphasizes efficiency. By producing high volumes of standardized
products, the firm hopes to take advantage of economies of scale and experience curve effects. It
requires a continuous search for cost reductions (raw material, components, labour, etc.)in all
aspects of the business.
Successful implementation also benefits from:
- process engineering skills
- products designed for ease of manufacture
- sustained access to inexpensive capital
- close supervision of labour
- tight cost control
- incentives based on quantitative targets.
5.2. Differentation Strategy
Differentiation is aimed at the broad market that involves the creation of a product or
services that is perceived throughout its industry as unique. The company or business unit may
then charge a premium for its product. This specialty can be associated with design, brand image,
technology, features, dealers, network, or customers service. Differentiation is a viable strategy for
earning above average returns in a specific business because the resulting brand loyalty lowers
customers' sensitivity to price.Increased costs can usually be passed on to the buyers. Buyers
loyalty can also serve as an entry barrier-new firms must develop their own distinctive competence
to differentiate their products in some way in order to compete successfully.
Maria Lopez Dominguez
81782 H
5.3. Focus Strategy
In this strategy the firm concentrates on a select few target markets. It is also called a
focus strategy or niche strategy. It is hoped that by focusing your marketing efforts on one or two
narrow market segments and tailoring your marketing mix to these specialized markets, you can
better meet the needs of that target market.