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Business Growth Strategy
Survival of the Fittest--- Innovation as a Strategy
What do you do when your most profitable market segment is fast becoming saturated by a number of smaller competitors-- and a 500-pound gorilla with deep pockets suddenly appears to grab what they can? a. Directly attack the smaller competitors and try to put them out of business b. Directly attack the gorilla and put yourself out of business c. All of the above d. None of the above If you answered d, you're correct! At least partially-- The answer is not to do "nothing", but to do something innovative. This is exactly the situation a client of mine found themselves in a couple of years ago. By developing an innovation centered solution, they not only saved their business but went on to enjoy increased profitability over the next two years. Waging War Attacking the competition is not only a poor substitute for good marketing-- it's war. And in war, the superior force almost always wins. Direct assaults often produce significant losses, especially when a well-capitalized foe fights back. In the 1980's a restaurant chain I'm familiar with was fighting for a bigger market share in the Midwestern U.S. They decided to attack a well positioned another chain by attempting to short circuit the competitor's highly successful free drink cup promotion. The attacking restaurant communicated to the competitor's customers that they were willing to offer a free food incentive to customers who would turn in their "free drink" cups. The victim responded by flooding the market with hundreds of the free cups, forcing the attacker to spend thousands of dollars to fulfill their advertised promise. Not smart. Conquering New Ground Rather than go to war with competitors, my client decided to establish a new position on a nearby, unoccupied hill. In other words, they opted to establish themselves in a new category that held the promise of higher gross margins. They did not invent a new product or service, they simply changed what they had, combined it with some additional features, and offered it to another market segment. By virtue of this planned innovation tactic, they established a new category. They did not have to beat the competition, they left it behind! Prior to the competitive intrusion by the 500-pound gorilla, my client had offered seminars, books and videos targeted to beginning and advanced accounting software users. When the segment became so saturated as to become almost unprofitable, all of the expertise gained in producing the original programs was channeled into different seminar and expert level materials that appealed to consultants who installed and supported the very same software application. This new market was hungry for this highly specialized information and was willing to pay far more for it than the previous customers. True innovation requires someone who can visualize the possibilities of an idea and who has the ability and tenacity to successfully implement it. That does not always mean that the innovator always has to create or invent something new, they can innovate by applying or implementing the inventions of others. There are many creative people who have new ideas,
BCG Growth-Share Matrix (see figure 1) happens to be one of many of BCG's strategic concepts the organisation developed in the late 1970s. As new competitors follow you into the new category. Question Marks and Dogs. Kotler 2003. Distancing yourself and creating barriers to entry through innovation can help create a sustainable competitive advantage for your company. Marketing can be a bit tricky after you've established yourself alone (at least for a while!) in a new category. but by then they'll innovate again! WHAT IS THE BCG GROWTH-SHARE MATRIX? To begin with. more innovative challenger. Siemens. As others entered the market (category) they needed to change their approach to a "Why you should buy ours instead of theirs" message. Consider companies like Apple Computer. Unilever. self-contained audio tape players by introducing the Walkman. and offers management available strategies to tackle various product lines. When Sony first created the category of small. The BCG model therefore becomes an invaluable analytical tool to evaluate an organisation’s diversified product lines as later seen in the ensuing sections. to classify an organisation’s product portfolio according to their cash usage and generation. it can be used to determine what priorities should be given in the product portfolio of a company. engaging in diversified product lines. McDonald 2003).but never implement them. WHAT ARE THE MAIN ASPECTS OF THE BCG GROWTH-SHARE MATRIX? The BCG Growth-Share Matrix is based on two dimensional variables: relative market share and market growth. portable. BCG is the acronym for Boston Consulting Group—a general management consulting firm highly respected in business strategy consulting. and is being taught at leading business schools and executive education programmes around the world. Instead of countering a competitor's every move. Cipher 2006): it can be used to classify product portfolio in four business types based on four graphic labels including Stars. A shift in emphasis may be necessary for a while in terms of educating buyers as to the benefits associated with your new category/offering. The larger the competitor. they try to distance themselves from the competition by moving into an area where the competitor may be weak. In other words. You probably have been used to aggressively promoting your "brand" while fighting it out with competitors. As far as my client goes. Cash Cows. products with greater market share or within a fast growing market are expected to wield 3 . usually the slower they are to react to a smaller. It is a management tool that serves four distinct purposes (McDonald 2003. or unable to follow without significant investment of time and effort. General Electric. they first needed to educate potential buyers as to what a "Walkman" was and why you should have one. lacking in expertise. Centrica and many more. They often are pointers to healthiness of a business (Kotler 2003. A Viable Strategy Innovators go beyond simply solving the problem immediately before them. their old competitors may eventually catch up with them someday. you will need to go back toward brand building again.
Let’s look at the following components of the model: Fig. a product life cycle and its associated market play a key role in decision-making. correlates with the product life cycle paradigm. Cash Cows 4 . Dell’s PC line shares the same market dominance theory as the iPod. and tends to attract a lot of competition.1%. The PC manufacture giant occupies a worldwide market share of 18.com 2006 Relative Market Share According to the proponents of the BCG (Herndemson 1972). and pulls a lot of organisation’s resources in an effort to increase gains. It captures the relative market share of a business unit or product. What that suggests is that the experience curve effect requires that market share is increased to be able to drive down costs in the long run and at the same time a company with a dominant market share will inevitably have a cost advantage over competitor companies because they have the greater share of the market. Similarly. But that is not all! It allows the analysed business unit be pitted against its competitors. A fast growing market is generally considered attractive. The reverse is also true. As earlier emphasized above. it tends to develop new ways in performing those tasks better which results in lower operating cost (Cipher 2006). which is commensurate to its large market revenue above its competitors (see figure 2). this is due to the sometime correlation between relative market share and the product’s cash generation. Analysts believe it is the impetus for Apple's financial rebirth 40% of Apple's sales is attributed to the iPod product line (Cantrell 2006). and predicates the cash requirement a product needs relative to the growth of that market. 1: Source: 12manage.relatively greater profit margins. A case in point is the technological market widely consider by experts as a fast growing market. market share is correlated with experience. improved efficiency from conducting business operations overtime. A case in point is Apple Computer’s flagship product called the iPod. Therefore. Figure 2: Source: Reuters 2006 Market Growth Market growth axis. which occupies a dominant 73% share the portable music player market (Cantrell 2006). The basic tenet of this postulation is that the more an organisation performs a task often. This phenomenon is often likened to the experience curve paradigm that when an organisation enjoys lower costs. Hence.
They pay the corporate dividend. This viewpoint is captured by the founders themselves thus: The cash cows fund their own growth. surplus cash from cash cow products should be channelled into Stars and Questions in order to create the future Cash Cows. according to industry’s experts. Consider Pfizer’s Inspra (Gibson 2006): “Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child. this is a rapidly growing market. McDonald 2003). Consider Hewlett-Packard’s small share of the digital camera market. A portfolio analysis of Pfizer's cardiovascular franchise would suggest redeploying promotional spend on Inspra to up-and-coming stars like Caduet (amlodipine/atorvastatin) or torcetrapib to ensure those drugs reach their sales potential. According to experts (Drummond & Ensor 2004. For example. Apple Computer has a large share in the rapidly growing market for portable digital music players (Cantrell 2006). They pay the corporate interest charges. They pay the corporate overhead. behind industry leader Canon’s 21% (Canon 2006). Dogs Dogs often have little future and are big cash drainers on the company as they generate very little cash by virtue of their low market share in a highly low growth market. They tend to/should generate large amounts of cash but also use a lot of cash because of growth market conditions. and require low investment for the fact that they are market leaders in a low-growth market. They supply the funds for R&D. They tend to use a lot of cash because of growth market conditions. Stars Stars are leaders in high growth markets. But.” The International Market Entry Evaluation Process 5 . the drug's earnings potential and positive cash flow is elusive at best. more effective spironolactone in the same Pfizer portfolio. Protect them (Henderson 1976). However. They supply the investment resource for other products. and eventually a cash cow when the market growth slowed. They justify the debt capacity for the whole company. Question Marks Question Marks have not achieved a dominant market position. It was thought to gain market share and become a star. given its perceived safety issues and a cheaper. despite anaemic sales of roughly $40 million in the $2. Inspra is likely to remain a dog.These products are said to have high profitability. Kotler 2003. and hence do not generate much cash. Because Pfizer invested heavily in promotion early on with Inspra.7 billion heartfailure market dominated by Toprol-XL (metoprolol). despite any amount of promotion.
You can choose any country to go into. The five steps are Country Identification.g. exchange rates. This lesson gives an outline of the way in which an organization should select which foreign to enter. In-Depth Screening.g. The International Marketing Entry Evaluation Process is a five stage process. Let's take a look at each step in turn. For example a country is nearby e.for example two countries might share a similar heritage e. the United States and Australia. There might be a simple match . level of domestiv consumption and so on. political ideology or religion e. Now you begin to score. Canada and the United States.How to Enter a Foreign Market.which means that you undertake a general overview of potential new markets. Step One .g.g. the United Kingdom and Australia. China and Cuba. Step Two . Often selection at this stage is more straightforward. Final Selection and Direct Experience. the European Union. a similar language e. Now you have the basis to start calculating the nature of market entry costs. weight and rank nations based upon macroeconomic factors such as currency stability. So you conduct country identification . Alternatively your export market is in the same trading zone e. Again at this point it is very early days and potential export markets could be included or discarded for any number of reasons. or even a similar culture. Preliminary Screening.g. Some 6 . and its purpose is to gauge which international market or markets offer the best opportunities for our products or services to succeed.Preliminary Screening At this second stage one takes a more serious look at those countries remaining after undergoing preliminary screening.Country Identification The World is your oyster.
Try to be flexible and experimental in new nations. Managers could also look at other nations that it has entered to see if there are any similarities. After this exercise the marketing manager should probably try to visit the final handful of nations remaining on the short.it's about what's best for your company . Managers would reflect upon strategic goals and look for a match in the nations at hand.this would need to be taken into account. There are some nations that are experiencing political instability and any company entering such a market would need to be rewarded for the risk that they would take. Step Five .happy hunting. and similar opportunities or threats to new entrants. Now you will need to be careful in respect of self-referencing. what prices can be charged in the nation? .Direct Experience Personal experience is important. Marketing manager or their representatives should travel to a particular nation to experience firsthand the nation's culture and business practices. One could also take into account the value of the nation's market. Step Three . Remember that your experience to date is based upon your life mainly in your own nation and your expectations will be based upon what your already know. ranking and weighting can be undertaken based upon more focused criteria. and don't be judgemental . The Five Forces Porter's Five Forces 7 . So it is vital that detailed information on the target market is obtained so that marketing decision-making can be accurate.countries such as China require that some fraction of the company entering the market is owned domestically .Final Selection Now a final shortlist of potential nations is decided upon. The company could look at close competitors or similar domestic companies that have already entered the market to get firmer costs in relation to market entry. targeting and positioning. any tariffs or quotas in operation. A final scoring. Now in-depth screening can begin. or learning that can be used to assist with decision-making in this instance. shortlist.How does one distribute a product or service such as ours in the nation? How should we communicate with are target segments in the nation? How does our product or service need to be adapted for the nation? All of this will information will for the basis of segmentation. Step Four . On a first impressions basis at least one can ascertain in what ways the nation is similar or dissimilar to your own domestic market or the others in which your company already trades. Now one can deal with not only micro-economic factors but also local conditions such as marketing research in relation to the marketing mix i. At this point the marketing manager could decide upon a shorter list of countries that he or she would wish to enter.In-Depth Screening The countries that make it to stage three would all be considered feasible for market entry.e.
industry DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity 8 .A MODEL FOR INDUSTRY ANALYSIS The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. Diagram of Porter's 5 Forces SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry BARRIERS TO ENTRY Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. However. part of this difference is explained by industry structure. Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. numerous economic studies have affirmed that different industries can sustain different levels of profitability.
These fragmented markets are said to be competitive. rivalry intensifies. and 50 firms in an industry also are available). But competition is not perfect and firms are not unsophisticated passive price takers. A high concentration ratio indicates that a high concentration of market share is held by the largest firms . Rivalry In the traditional economic model. firms strive for a competitive advantage over their rivals. In pursuing an advantage over its rivals. a maverick firm seeking a competitive advantage can displace the otherwise disciplined market.improving features. moderate. the industry is considered to be disciplined. A low concentration ratio indicates that the industry is characterized by many rivals. Improving product differentiation . or weak. If rivalry among firms in an industry is low. The CR indicates the percent of market share held by the four largest firms (CR's for the largest 8. implementing innovations in the manufacturing process and in the product itself. The Concentration Ratio (CR) is one such measure. Creatively using channels of distribution . and strategic analysts are interested in these differences. The concentration ratio is not the only available measure. with high-end 9 . intense. the role of a leading firm. Rather. Explicit collusion generally is illegal and not an option.the industry is concentrated. The Bureau of Census periodically reports the CR for major Standard Industrial Classifications (SIC's). based on the firms' aggressiveness in attempting to gain an advantage.Substitutes available Buyers' incentives -Diversity of rivals -Corporate stakes I. Economists measure rivalry by indicators of industry concentration. none of which has a significant market share. The intensity of rivalry commonly is referred to as being cutthroat.raising or lowering prices to gain a temporary advantage. With only a few firms holding a large market share. or informal compliance with a generally understood code of conduct. However.using vertical integration or using a distribution channel that is novel to the industry. in low-rivalry industries competitive moves must be constrained informally. The intensity of rivalry among firms varies across industries. the competitive landscape is less competitive (closer to a monopoly). This discipline may result from the industry's history of competition. For example. When a rival acts in a way that elicits a counter-response by other firms. a firm can choose from several competitive moves: • • • Changing prices . competition among rival firms drives profits to zero. the trend is to define industries in terms that convey more information than distribution of market share. 25.
There is greater possibility for mavericks and for misjudging rival's moves. High exit barriers place a high cost on abandoning the product. A diversity of rivals with different cultures. 3. and philosophies make an industry unstable. Slow market growth causes firms to fight for market share. Since the firm must sell this large quantity of product. Litton Industries' acquisition of Ingalls Shipbuilding facilities illustrates this concept. on the other hand. Exploiting relationships with suppliers . the firm must produce near capacity to attain the lowest unit costs. Low levels of product differentiation is associated with higher levels of rivalry. is populated by hospitals that historically are community or charitable institutions. Roebuck and Co. But when the Vietnam war ended. A common exit barrier is asset specificity. these assets cannot easily be sold to other buyers in another industry. High fixed costs result in an economy of scale effect that increases rivalry.• jewelry stores reluctant to carry its watches. This mix of philosophies about mission has lead occasionally to fierce local struggles by 10 . Strategic stakes are high when a firm is losing market position or has potential for great gains. even when the venture is not profitable. 5. dominated the retail household appliance market. leading to a struggle for market leadership. Low switching costs increases rivalry. defense spending declined and Litton saw a sudden decline in its earnings. 2. Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market. As the firm restructured. competition for customers intensifies. When the plant and equipment required for manufacturing a product is highly specialized. 7. from the 1950's to the 1970's Sears. 9. This intensifies rivalry. histories. In a growing market. firms are able to improve revenues simply because of the expanding market. 8. High storage costs or highly perishable products cause a producer to sell goods as soon as possible.for example. When total costs are mostly fixed costs. high levels of production lead to a fight for market share and results in increased rivalry. 6. If other producers are attempting to unload at the same time. by hospitals that are associated with religious organizations or universities. When a customer can freely switch from one product to another there is a greater struggle to capture customers. divesting from the shipbuilding plant was not feasible since such a large and highly specialized investment could not be sold easily. Litton was successful in the 1960's with its contracts to build Navy ships. Rivalry is volatile and can be intense. for example. and Litton was forced to stay in a declining shipbuilding market. The intensity of rivalry is influenced by the following industry characteristics: 1. The firm must compete. A larger number of firms increases rivalry because more firms must compete for the same customers and resources. tends to constrain rivalry. 4. Brand identification. Sears set high quality standards and required suppliers to meet its demands for product specifications and price. and by hospitals that are for-profit enterprises. The rivalry intensifies if the firms have similar market share. The hospital industry. High exit barriers cause a firm to remain in an industry.
To the economist. The price of aluminum beverage cans is constrained by the price of glass bottles. a shakeout is inevitable Surviving rivals will have to grow faster than the market Eventual losers will have a negative cash flow if they attempt to grow All except the two largest rivals will be losers The definition of what constitutes the "market" is strategically important. and the largest competitor will have no more than four times the market share of the smallest. it implies that: o o o o o If there is a larger number of competitors. A close substitute product constrains the ability of firms in an industry to raise prices. and company failures. Today. To the manufacturer of automobile tires. a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. new tires are not so expensive that car owners give much consideration to retreading old tires. retreading remains 11 . In the truck tire market. II. the demand becomes more elastic since customers have more alternatives. At other times. BCG founder Bruce Henderson generalized this observation as the Rule of Three and Four: a stable market will not have more than three significant competitors. But in the trucking industry new tires are expensive and tires must be replaced often. steel cans. Industry Shakeout.hospitals over who will get expensive diagnostic and therapeutic services. If this rule is true. The industry may become crowded if its growth rate slows and the market becomes saturated.as more substitutes become available. and in the greeting card industry in which there are more predictable business cycles. price wars. These containers are substitutes. A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A product's price elasticity is affected by substitute products . Whatever the merits of this rule for stable markets. Cyclical demand tends to create cutthroat competition. with intense competition. yet they are not rivals in the aluminum can industry. This is true in the disposable diaper industry in which demand fluctuates with birth rates. tire retreads are a substitute. creating a situation of excess capacity with too many goods chasing too few buyers. A point is reached where the industry becomes crowded with competitors. and demand cannot support the new entrants and the resulting increased supply. and plastic containers. The competition engendered by a Threat of Substitute comes from products outside the industry. local hospitals are highly cooperative with one another on issues such as community disaster planning. 10. it is clear that market stability and changes in supply and demand affect rivalry. Threat Of Substitutes In Porter's model. substitute products refer to products in other industries. A shakeout ensues.
Under such market conditions. Consider the substitutability of different types of TV transmission: local station transmission to home TV antennas via the airways versus transmission via cable. but frequently there is some asymmetry between a producing industry and buyers. III.a market in which there are many suppliers and one buyer.a viable substitute industry.can threaten to buy producing firm or rival Example DOD purchases from defense contractors Circuit City and Sears' large retail market provides power over appliance manufacturers Large auto manufacturers' purchases of tires Buyers are Weak if: Producers threaten forward integration producer can take over own distribution/retailing Example Movie-producing companies have integrated forward to acquire theaters 12 . there can be other concerns in assessing the threat of substitutes. In general. cloth diapers are a substitute and their prices constrain the price of disposables. Buyer Power The power of buyers is the impact that customers have on a producing industry. In reality few pure monopsonies exist. the buyer sets the price. While the threat of substitutes typically impacts an industry through price competition. The following tables outline some factors that determine buyer power. when buyer power is strong. In the disposable diaper industry. the relationship to the producing industry is near to what an economist terms a monopsony . Buyers are Powerful if: Buyers are concentrated . and telephone lines. Except in remote areas it is unlikely that cable TV could compete with free TV from an aerial without the greater diversity of entertainment that it affords the customer. satellite.there are a few buyers with significant market share Buyers purchase a significant proportion of output . The new technologies available and the changing structure of the entertainment media are contributing to competition among these substitute means of connecting the home to entertainment.distribution of purchases or if the product is standardized Buyers possess a credible backward integration threat .
Suppliers are Powerful if: Credible forward integration threat by suppliers Suppliers concentrated Significant cost to switch suppliers Customers Powerful Example Baxter International. a distributor Drug industry's relationship to hospitals Microsoft's relationship with PC manufacturers Boycott of grocery stores selling non-union picked grapes Suppliers are Weak if: Many competitive suppliers .labor.no buyer has any particular influence on product or price Producers supply critical portions of buyers' input . This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. such as selling raw materials at a high price to capture some of the industry's profits. The following tables outline some factors that determine supplier power.distribution of purchases IBM's 360 system strategy in the 1960's Most consumer products Intel's relationship with PC manufacturers IV.products not standardized and buyer cannot easily switch to another product Buyers are fragmented (many. Suppliers. components. can exert an influence on the producing industry. acquired American Hospital Supply. and other supplies.Significant buyer switching costs .product is standardized Example Tire industry relationship to automobile manufacturers 13 . manufacturer of hospital supplies. if powerful. different) . Supplier Power A producing industry requires raw materials .
When profits decrease. deters rivals from entering a market. and if free entry and exit exists. over time driving down profits for all firms in the industry. any firm should be able to enter and exit a market. differentiation. or the expectation that future prices will fall. industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. however. Barriers to entry are more than the normal equilibrium adjustments that markets typically make. Falling prices. we would expect additional firms to enter the market to take advantage of the high profit levels. the possibility that new firms may enter the industry also affects competition. Michael Porter identified three generic strategies (cost leadership. These are barriers to entry.Purchase commodity products Credible backward integration threat by purchasers Concentrated purchasers Customers Weak Grocery store brand label products Timber producers relationship to paper companies Garment industry relationship to major department stores Travel agents' relationship to airlines V. we would expect some firms to exit the market thus restoring a market equilibrium. Firms also may be reluctant to enter markets that are extremely uncertain. For example. GENERIC STRATEGIES TO COUNTER THE FIVE FORCES Strategy can be formulated on three levels: • • • corporate level business unit level functional or departmental level. and focus) that can be 14 . The business unit level is the primary context of industry rivalry. such entry-deterring pricing establishes a barrier. when industry profits increase. In reality. Barriers to Entry / Threat of Entry It is not only incumbent rivals that pose a threat to firms in an industry. These are normal accommodations to market conditions. In theory. then profits always should be nominal. But if firms individually (collective action would be illegal collusion) keep prices artificially low as a strategy to prevent potential entrants from entering the market. especially if entering involves expensive start-up costs.
or objectives. Minztberg calls strategies that unfold in this way emergent strategies. Minztberg claims that some organizations begin implementing strategies before they clearly articulate mission. change it. Benchmarking 15 . or train the people who do it. The proper generic strategy will position the firm to leverage its strengths and defend against the adverse effects of the five forces Mintzberg Operating core Those who perform the basic work related directly to the production of products and services Strategic apex Charged with ensuring that the organisation serve its mission in an effective way. goals. but they do not do it themselves Support staff Composed of specialised units that exist to provide support to the organisation outside the operating work flow Henry Mintzberg suggests that the traditional way of thinking about strategy implementation focuses only on deliberate strategies. and also that it serve the needs of those people who control or otherwise have power over the organisation Middle-line managers Form a chain joining the strategic apex to the operating core by the use of delegated formal authority Technostructure The analysts who serve the organisation by affecting the work of others. They may design it.implemented at the business unit level to create a competitive advantage. Implementation of emergent strategies involves the allocation of resources even though an organization has not explicitly chosen its strategies. In this case strategy implementation actually precedes strategy formulation. plan it.
Mission and Vision Statements and Customer (Client) Surveys are the most used (by 77% of organisations) of 20 improvement tools. productivity per unit of measure. followed by SWOT analysis(72%). The wide appeal and acceptance of benchmarking has led to various benchmarking methodologies emerging. The term benchmarking was first used by cobblers to measure people's feet for shoes. and comparing the results and processes of those studied (the "targets") to one's own results and processes to learn how well the targets perform and. time. was originally invented as a formal process by Rank Xerox. more importantly. The tools that are likely to increase in popularity the most over the next three years are Performance Benchmarking. The results showed that: 1. a comprehensive survey on benchmarking was commissioned by The Global Benchmarking Network. cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others. how they do it. Collaborative benchmarking Benchmarking. 2. Procedure There is no single benchmarking process that has been universally adopted. Dimensions typically measured are quality. SWOT.Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries.g. and Informal Benchmarking (68%). Performance Benchmarking was used by (49%) and Best Practice Benchmarking by (39%). Improvements from learning mean doing things better. faster. and cost. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure. Popularity and benefits from benchmarking In 2008. One example is that of the Dutch municipally-owned water supply companies. Benchmarking involves management identifying the best firms in their industry. Over 450 organizations responded from over 40 countries. is usually carried out by individual companies. a network of benchmarking centers representing 22 countries. subsidiaries of a multinational in different countries). which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association. Over 60% of organizations that are not currently using these tools indicated they are likely to use them in the next three years 3. and Best Practice Benchmarking. or any other industry where similar processes exist. They would place someone's foot on a "bench" and mark it out to make the pattern for the shoes. The seminal book on benchmarking is Boxwell's Benchmarking for Competitive Advantage published 16 . Another example is the UK construction industry which has carried out benchmarking since the late 1990s again through its industry association and with financial support from the UK Government. and cheaper. Sometimes it may be carried out collaboratively by groups of companies (e. Informal Benchmarking.
and magazines to determine which companies are worthy of study.Because benchmarking can be applied to any business 2. process or function. 4. base lining performance provides a point against which improvement effort can be measured. The following is an example of a typical benchmarking methodology: 1. Visit the "best practice" companies to identify leading edge practices . quality control variance reports. 6. Identify potential partners 4. a range of research techniques may be required.by McGraw-Hill in 1994. cell phone switching between towers. a token gift. Determine the gap 7. Identify data sources 5. Target future performance 9. The first book on benchmarking. Identify organizations that are leaders in these areas .This includes hotel rooms. meals. processes. Identify your problem areas . is a practical guide and offers a 7-step approach. Define the process 3. 5. 17 . transfer of patients from surgery to recovery rooms. and lost labor time. suppliers. trade associations. The 12 stage methodology consisted of 1.Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group. Consult customers. employees. Survey companies for measures and practices . Implement 12. These could include air traffic control. written and published by Kaiser Associates.Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Select subject ahead 2. Before embarking on comparison with other organizations it is essential that you know your own organization's function. process mapping. travel costs. quantitative research. Implement new and improved business practices . or financial ratio analysis. financial analysts. It has withstood the test of time and is still a relevant read.Look for the very best in any industry and in any country. questionnaires. Review/recalibrate. Surveys are typically masked to protect confidential data by neutral associations and consultants. Identify other industries that have similar processes . Adjust goal 11. or suppliers. Establish process differences 8. Cost of benchmarking The three main types of costs in benchmarking are: • Visit Costs .Take the leading edge practices and develop implementation plans which include identification of specific opportunities. 3. Collect data and select partners 6. exploratory research techniques such as focus groups. They include: informal conversations with customers. Robert Camp (who wrote one of the earliest books on benchmarking in 1989) developed a 12-stage approach to benchmarking. surveys. or in-depth marketing research. Communicate 10. re-engineering analysis. funding the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.For instance if one were interested in improving hand offs in addiction treatment he/she would try to identify other fields that also have hand off challenges.
the process of designing new products or upgrades to current ones.performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity. These aim to capture benchmarks and best practices from organizations.the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. meaning it is best to look at other industries.Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now. Indeed. Technical Benchmarking/Product Benchmarking The technique initially used to compare existing corporate strategies with a view to achieving the best possible performance in new situations (see above). Activity analysis will be required where the objective is to benchmark cost and efficiency. and implementation. Such analyses were initially carried out in-house by car makers and their suppliers. Performance benchmarking . The cost of benchmarking can substantially be reduced through utilizing the many internet resources that have sprung up over the last few years. Types of benchmarking • • • • • • Process benchmarking . as they are expensive. Product benchmarking . Benchmarking Database Costs .• • Time Costs . where it is vital to design products that match precise user expectations. finding exceptional companies to study. they are increasingly outsourced to companies specialized in this area. has recently been extended to the comparison of technical products. This will take them away from their regular tasks for part of each day so additional staff might be required. software). Benchmarking from an investor perspective. Its use is particularly well developed within the automotive industry ("Automotive Benchmarking"). This type is usually not industry specific. visits. Strategic benchmarking . However. Financial benchmarking . by applying the best technologies available worldwide. increasingly applied to back-office processes where outsourcing may be a consideration.extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor. outsourcing has enabled a drastic decrease in costs for each company (by cost sharing) and the development of very efficient tools (standards. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses. Many data are obtained by fully disassembling existing cars and their systems. at minimum possible cost.Members of the benchmarking team will be investing time in researching problems.allows the initiator firm to assess their competitive position by comparing products and services with those of target firms. business sectors and countries to make the benchmarking process much quicker and cheaper. 18 .involves observing how others compete. This process is usually referred to as "Technical Benchmarking" or "Product Benchmarking".
including applications to schools. Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison. Metric Benchmarking Another approach to making comparisons involves using more aggregative cost or production information to identify strong and weak performing units. Metrics definitions may also change over time within the same organization due to changes in leadership and priorities. DEA can be used to reward companies/operators whose costs are near the efficient frontier with additional profits. In infrastructure regulation.embraces everything from staffing and productivity to office flow and analysis of procedures performed. 19 . Regression analysis estimates what the average firm should be able to achieve.involves studying the leading competitor or the company that best carries out a specific function. Best-in-class benchmarking . With regression analysis firms that performed better than average can be rewarded while firms that performed worse than average can be penalized. have been utilized to identify high performers and weak performers in a number of industries. Complex functions such as Human Resources. One of the biggest challenges for Metric Benchmarking is the variety of metric definitions used by different companies and/or divisions.• • • Functional benchmarking .a company will focus its benchmarking on a single function to improve the operation of that particular function. The most useful comparisons can be made when metrics definitions are common between compared units and do not change over time so improvements can be verified. A variety of advanced statistical techniques. Operational benchmarking . and electric utilities. allowing outsiders to evaluate the performance of operators in an industry. including stochastic frontier analysis. The two most common forms of quantitative analysis used in metric benchmarking are data envelope analysis (DEA) and regression analysis. water utilities. DEA estimates the cost level an efficient firm should be able to achieve in a particular market. Such benchmarking studies are used to create yardstick comparisons. hospitals.
Management must therefore exercise caution when making additional investments in this product/service. The expert system will position your enterprise on the chart based upon your description of: • • • • • bargaining power of the buyers bargaining power of the suppliers internal rivalry the threat of new entrants the threat of substitutes The horizontal axis represents the firm's competitive strength or ability to compete in the industry. adjusting your input until you are satisfied your description accurately characterizes your enterprise. The Yellow Zone consists of the three diagonal cells from the lower left to the upper right. The suggested strategy is to seek to maintain share rather than growing or reducing share. This indicates a "green light" to invest in this product/service. The nine cells are grouped into three zones: The Green Zone consists of the three cells in the upper left corner. If your enterprise falls in this zone you are in a favorable position with relatively attractive growth opportunities. yielding nine cells. pioneered the nine cell strategic business screen illustrated here. A position in the yellow zone is viewed as having medium attractiveness. 20 . Characterize Your Enterprise The vertical axis represents the industry attractiveness. The circle on the matrix represents your enterprise. Both axes are divided into three segments. It includes an analysis of: • • • • the value and quality of the offering market share staying power experience You can trace through the supporting analysis and its conclusions.Description of the Model The General Electric Company. with the aid of the Boston Consulting Group and McKinsey and Company.
establish a ceiling for the market share you wish to achieve seek attractive new segments to segment the market to find a more attractive position make contingency plans to protect your vulnerable position 21 • act to preserve or boost cash flow as you exit the business seek an opportunistic sale seek a way to increase your strengths • • • . However. if you can't strengthen your enterprise you should exit the market.The Red Zone consists of the three cells in the lower right corner. Consider the following strategies: • • invest heavily in selected segments. The suggested strategy is that management should begin to make plans to exit the industry. Consider the following strategies: • Medium Attractiveness Average Competitive Position The strategy advice for this cell is to selectively invest for earnings. Consider the following strategies: • High Attractiveness Average Competitive Position The strategy advice for this cell is to invest for growth. Analysis of Your Enterprise Position High Attractiveness Strong Competitive Position The strategy advice for this cell is to invest for growth. Consider the following strategies: • • • • provide maximum investment diversify consolidate your position to focus your resources accept moderate near-term profits to build share • • High Attractiveness Weak Competitive Position The strategy advice for this cell is to opportunistically invest for earnings. Consider the build selectively following strategies: on strength define the • ride with the market implications of growth challenging for • seek niches or market specialization leadership • seek an opportunity fill weaknesses to increase strength to avoid through acquisition vulnerability Medium Attractiveness Weak Competitive Position The strategy advice for this cell is to preserve for harvest. Consider the following strategies: • Medium Attractiveness Strong Competitive Position The strategy advice for this cell is to selectively invest for growth. A position in the red zone is not attractive.
You should exit the market or prune the product line. a critical look at the components to be applied in implementing the strategy would be a good pointer. • defend strengths shift resources to attractive segments examine ways to revitalize the industry time your exit by monitoring for harvest or divestment timing 2. This is so because the needs 22 . To identify significant problems encountered in implementing a new strategy in a business. . resource planning and the management of strategic change". • • make only essential commitments prepare to divest shift resources to a more attractive segment • Identify major difficulties encountered in strategy implementation 'Strategy is defined as the determination of the basic long-term goals and objectives of an enterprise. Consider the following strategies: • Low Attractiveness Weak Competitive Position The advice for this cell is to harvest or divest.apply strengths Low Attractiveness Strong Competitive Position The strategy advice for this cell is to selectively invest for earnings. translating the strategy into organisational action by using the structure of the organization will also be dependant on the type of structure in use in the organization. Consider the following strategies: • • Low Attractiveness Average Competitive Position The strategy advice for this cell is to restructure. Organisational structure and design. and the adoption of courses of action and the allocation of resources necessary for carrying out those goals'' Chandler(1962) Implementing a strategy or strategy implementation is defined as "the translation of strategy into organisational action through organisational structure and design. harvest or divest. and strategy implementation. These are considered below: 1.
by legal means. 3. routines and beliefs of those in the organization. there should be compromise if implementing a new strategy will succeed in any business. There is a clear view within an organization of the strategy to be followed. Another problem encountered here is the way and manner information is passed down or up the ranks. This a critical success factor analysis can be pursue as a start in resource planning. This resource configuration is dependent on: protecting unique resources i. the strategy being followed by the organization. where a strategy depends on the uniqueness of a particular resource such as patent. 6. The next component in the implementation stage of the strategy is the management of strategic change. and transformational change . Change will not occur unless there is a commitment to change The approach to managing strategic change is likely to be context dependent. 4.of a multinational organization are different from those of a small business. such as gaining market share into critical factors that will make the purpose achievable and ultimately achieved. and it must be protected. it there is a problem in managing change based on misinformation. It is also possible that the extent of devolution or centralisation can influence strategy implementation. it is difficult to know where to start. Although the implementation of strategy concerns the changing aspect of organization structure. 2. c. Recognition must be given to organisational structure and design's set up where operational and strategic decisions are made.resource planning sets out resources and competences need to be created. It deals with the identification of resources needed and how those resources will be deployed and controlled to create the competences needed to implement the strategies successfully. people's behaviours and perceptions may not have changed. One of the major problems of strategy implementation as a result of resource planning is a failure to translate statements of strategic purpose. d. The next aspect in strategy implementation . Change must address the powerful influence of the paradigm and cultural web on. This can be solved by devolving the central command for easy flow of information among all rank and files especially in implementing a new strategy in a business. b. management must also adopt appropriate styles to manage the change processes. or lack of information. It is widely accepted that strategic change builds on four underlying premises: a.which requires the organization to change its paradigm over time.incremental change-which merely builds on the skills.e. For example. There are two types of change . It could also be a change in strategy that will necessitate the change. so that change is efficient and likely to win their commitment. If there is a blockage which impedes the flow of information processes it means that decisions would be made based on outdated or obsolete information.. The problem here is that due to the non-uniformity in the times needed for the various activities. control systems and resource planning which does affect the day-to-day operations of members of the organization. To effect a successful strategy implementation. 5. It could be a change in routine (''the way of doing things around here''. 23 .
) Explain the concept of value chain analysis. packaging. transportation and distribution. This involves the explanation of the reasons for and means of strategic change. The nine activity groups are: Primary activities: 1. service: installation. 2. Examples of primary activities would be sales. The cost structure of an organisation can be subdivided into separate processes or functions assuming that the cost drivers for each of these activities behave differently. pricing. legal. 3. 5. inbound logistics: materials handling. Porter's strength was to condense this activity based cost analysis into a generic template consisting of five primary activities and four support activities. promotion. classify them into primary and secondary activities and most importantly of all. intervention. Collaboration or participation involving those who will be affected by strategic change in the identification of strategic issues.education and communication style will be used. distribution. spare part management. marketing and sales: advertising. 4. Support activities: 6. The value chain allows an organisation to understand what activities it performs. firm infrastructure: general management. operations: machine operating. servicing. channel management. The activities can be categorised as being either primary or secondary. understand which ones add value to the customer. warehousing. inventory control. while secondary activities would be accounts. direction and coercion styles. Primary activities are directly involved in serving the customer while secondary support the primary ones. investor relations. The value chain is basically the set of activities that an organisation performs. planning. transportation. assembly. testing and maintenance. finance. warehousing. Value Chain Analysis helped identify a firm's core competencies and distinguish those activities that drive competitive advantage. The value chain was a concept initially proposed by McKinsey (the management consultants) and later developed and made public by Harvard strategy guru Michael Porter. 24 . operations. selling. outbound logistics: order processing.. HR etc.
technology development: research & development. Top management also shapes the perceived relationships among organization components. product and process development. decision-making processes. reward systems. 25 .e. human resource management: recruitment. Top management is also responsible for the design and control of the organization's reward and incentive systems. or how this composition allows the firm to differentiate its products to specific customer segments. information flow. the ways a firm can best position itself against its competitors given its relative cost structure. i. lease properties. education. promotion. By subdividing an organisation into its key processes or functions.7. Top management provides a role model for other managers to use in assessing the salient environmental variables. Q) Technique of strategic controls Premise control Implementation control Strategic surveillance Special alert control 5.. and job assignments).g. supplier contract negotiations. role of top management in strategic control and implementation ROLE OF TOP MANAGEMENT Top management is essential to the effective implementation of strategic change. 9. procurement: purchasing raw materials. Management must also recognize the existing organization culture and learn to work within or change its parameters. their relationship to the organization. and the appropriateness of the organization's response to these variables. IT. 8. Top management is largely responsible for the determination of organization structure (e. how the composition of the value chain allows the firm to compete on price. Porter was able to link classical accounting to strategic capabilities by using value as a core concept.
Finally. top management are involved in the design of information systems for the organization. Implementing strategic plans may require leaders who lead through inspiration and coaching rather than command and control. inspiring. which can lead to passive resistance and hidden rebellion. managers influence the environmental variables most likely to receive attention in the organization. 26 . A key role of a CEO's is to communicate a vision and to guide strategic planning. They must also make certain that information concerning these key variables is available to affected managers. Organization members need information to maintain a realistic view of their performance. and the organization's relationship to the environment. the performance of the organization. Recognizing and rewarding success. and increases each individual's motivation to see plans succeed. and modeling behaviors is more likely to result in true commitment than use of authority. In this role. Top-level managers must also provide accurate and timely feedback concerning the organization's performance and the performance of individual business units within the organization. Those who have successfully implemented strategic plans have often reported that involving teams at all levels in strategic planning helps to build a shared vision.
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