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Introduction To Business Strategy: (Discover New Opportunities. Manage and Eliminate Threats.)
Introduction To Business Strategy: (Discover New Opportunities. Manage and Eliminate Threats.)
BUSINESS
STRATEGY
[Discover New Opportunities.
Manage and Eliminate
Threats.]
The aim of this paper is to provide a summary of those models from
Management literature most often used in student assignments,
management activities & business consultancy.
Table of Contents
Table of Contents.......................................................................................2
MAIN REFERENCES.....................................................................................3
INTRODUCTION TO STRATEGY...................................................................6
PESTLIED.................................................................................................13
PORTERS DIAMOND.................................................................................19
SWOT ANALYSIS......................................................................................28
STRATEGIC TRIANGLE..............................................................................31
GENERIC STRATEGIES..............................................................................40
Models aim to clarify the relationship between different elements, indicating causal &
effective interaction. They often try to show how a change in one part of a system or
process may impact other parts. As such, a model is a dynamic representation of reality,
demonstrating how different forces from inside or outside the system may change the
whole.
The models in this paper are presented in a way that most effectively summarizes the
interaction of main elements & usually follow the form produced by the original author.
Each model is accompanied by explanatory text which is in following sections:
Selection of models
I have not included all the possible models. Criteria of selecting models are:
Those models which most often help, & are expected to used, in written student
assignments, projects, case studies or dissertation
Those generic models which provide the most useful conceptual framework on
which to build more specific & detailed understanding
Those models which are most useful to relation to the normal activities of todays
organization
Strategy can also be defined as the determination of the basic long-term goals & objectives
of an enterprise & the adoption of courses of action & the allocation of resources necessary
for carrying out those goals.
Strategies exist at several levels in any organization - ranging from the overall business (or
group of businesses) through to individuals working in it.
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. Corporate strategy is often stated explicitly in a "mission statement".
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.
Operational Strategy - is concerned with how each part of the business is organized to
deliver the corporate and business-unit level strategic direction. Operational strategy
therefore focuses on Challenges of resources, processes, people etc.
Strategic decisions
What are strategic decisions?
Johnson & Scholes (2002) suggest that strategic decisions are all about some of the
following:
Long-term direction of an organization- strategic decision is likely to be
concerned with the long-term survival of an organization.
Securing advantage strategic decisions also concern effective positioning in
relation to competitors to achieve advantage in the market.
Scope of an organizations activities strategies decisions are likely to be
concerned with the scope of an organizations activities.
Using the links between the organization & the environment strategy can be
seen as matching the activities of an organization to the environment in which it
operates.
Major resource change- strategies may require major resource changes for an
organization.
Values & expectations the strategy of an organization is affected not only by
environmental forces & resource availability, but also by the values & expectations of
those who have power in & around the organization.
Strategic decision affects operational decisions.
Strategic thinking
In thinking about strategy, three themes can be picked out:
The long-term plan thinking strategically means raising ones eyes from day-to-
day problems to consider how the relationship between the organization & its
environment is shaping up for the long term.
Big Challenges strategic thinking means converting an awareness of trends into
an overall picture of the environment & how the organization should relate to it.
Interdependency understanding the way that each of the big Challenges links to
the others enables the strategist to see the map as it changes.
Pattern
Position Ploy
Perspective Plan
Principle
Assumption
Elements
Plan
Some sort of consciously intended course of action, a guideline (or set of guidelines) to deal
with a situation.
Ploy
Pattern
Position
Perspective
The Perspective is the concept or character of an organization- its collective mind, intention
or behavior.
Challenges
Understanding
The five Ps are simply labels to help develop appropriate strategic thinking. They should
not define or restrict our thinking but should act as an aid to unravel the complexity
implicit in strategy.
Compatibility
Flexibility
Plans, Position & ploys may be easily changed whereas Perspectives & Patterns are longer
term & more fundamental.
Programme
Applications
Consciously considering strategy in different ways can help people to think laterally &
creatively about range of Challenges.
Assessment of strategy
The definitions can be used to analyze the breadth of strategic Challenges faced by an
organization & to help assess strategy from different viewpoints.
The model can help to define both the formal & informal Challenges impacting on strategy
& its development.
INTRODUCTION TO BUSINESS STARTEGY
Any business has to deal with three things ENVIRONMENT which it operates, INDUSTRY
which it competes & PRODUCT which it produces.
Business level strategy is the firm specific strategy that facilitates in gaining competitive
advantage in the market. The business level strategy of the organization outlines the
methodologies of the organization regarding competing with rival firms in the market.
PESTILED
Porters Diamond.
INTRODUCTION TO ENVIRONMENT ANALYSIS
In the very broadest sense the environment means that which is external to & within which
some entity exists.
If in discussing the environment we take the individual organization or firm as our reference
point, the boundaries of the firm conveniently define on the one side an internal environment
within which its members work & the firms resources are organized & the other the external
environment outside those firm boundaries.
The external environment we are concerned with comprises the whole set of relevant strategic
conditions surrounding the firm. This can be termed as the strategic environment.
COMPETITIVE
ENVIRONMENT
INDUSTRY ENVIRONMENT
BUSINESS UNIT
THE
FIRM
ENVIRONMENT
PESTLIED
ECONOMICAL
TECHNICAL
POLITICAL SOCIAL
LEGAL
ORGANISATIO
DEMOGRAPHIC N
INTERNATIONAL
ENVIRONMENTAL
Principle
Assumption
Various factors in the environment can have significant impact on the performance of
organization operating within their sphere of influence.
Elements
Political
Political factors include government regulations and legal issues and define both formal
and informal rules under which the firm must operate.
Economic:
Social:
Technological:
Legal matters
Legislation may affect the organization & can inhibit or enhance its performance.
Environmental
These factors are environmental constraints on factory operation such as green Challenges
Demographic
Demographic factors comprise the availability of workforce, & age difference, which
impinge upon organizational performance.
Challenges
The importance of the various PESTLIED factors varies according to the nature of the
organization.
Other factors
Besides PESTLIED factors, there are other factors or environments that affect the
organization.-for example, the competitive environment.
Applications
Planning
The model may be used as a checklist in the planning process to ensure that the forecast
effects of PESTLIED factors are taken into account.
Management development
The use of the list of PESTLIED factors encourages managers to become less insular & to
consider the impact of external influences upon their organizations.
GEO BUSINESS MODEL
MOTIVATIONAL VARIABLES
CONDTIONING
VARIABLES
CONTROL VARIABLES
Principle
Assumptions
There are three main interacting forces that affect firms international business action.
Elements
Conditioning variables
Product-specific variables: conferring competitive advantages for the foreign investor for
example, R&D, product differentiation, product processing, management skills, know- how,
economics of scale.
Motivational variables
Control variables
These comprise administrative actions-i.e. laws & policies of home & host governments that
directly or indirectly influence international business through positive incentives & or
negative controls.
Challenges
International relevance
The model applies to the international business action of all firms, not just those classified
as multinationals.
Interdependence
The variables are interlinked- for example, wage controlled, low labour costs in a particular
country may be classified as a country-specific variable (conditioning) & a production-
efficiency seeking measures (motivation). Wage control would also be a control variable.
Effect on organizations
The variables will impact in different ways, depending on the organizations specific
activities.
Influence of variables
Applications
Growth strategies
The model may be used in the assessment & development of international business growth
strategies.
Another application lies in the assessment of the potential for growth given a change in
international conditions.
Evaluation
The model can help in the evaluation of international competitors & markets.
Decision-making
The model is an aid in deciding whether or not to embark upon international business
activities.
Assessment
The model may be used to assess the relative importance & interaction of the different
variables to the organization.
PORTERS DIAMOND
Porter introduced this model in his book: the Competitive Advantage of Nations, after
having done research in ten leading trading nations. The book was the first theory of
competitiveness based on the causes of the productivity with which companies compete
instead of traditional comparative advantages such as natural resources and pools of
labor. This book is considered required reading for government economic strategists and
is also highly recommended for corporate strategist taking an interest in the macro-
economic environment of corporations.
FIRM STRATEGY,
STRUCTURING & RIVALRY
DEMAND
FACTOR
CONDITIONS
CONDITIONS
Principle
The model shows how a nations international success within a specified industry depends
upon four specific attributes which promote or impede competitive advantage.
Traditionally, economic theory mentions the following factors for comparative advantage
for regions or countries:
A. Land
B. Location
D. Labor, and
Assumption
The individual points on the diamond and the diamond as a whole affect four ingredients
that lead to a national comparative advantage. These ingredients are:
1. the availability of resources and skills,
2. information that firms use to decide which opportunities to pursue with those
resources and skills,
Elements
Factor conditions
Factors conditions are the state of the nations factors of production, such as labour, land,
capital, natural resources & infrastructure.
Demand conditions
When the market for a particular product is larger locally than in foreign markets,
the local firms devote more attention to that product than do foreign firms, leading
to a competitive advantage when the local firms begin exporting the product.
When the market for a particular product is larger locally than in foreign markets,
the local firms devote more attention to that product than do foreign firms, leading
to a competitive advantage when the local firms begin exporting the product.
A strong, trend-setting local market helps local firms anticipate global trends. A
strong, trend-setting local market helps local firms anticipate global trends.
Related & supporting industries
When local supporting industries are competitive, firms enjoy more cost effective
and innovative inputs.
This effect is strengthened when the suppliers themselves are strong global
competitors.
Firms strategy, structure & rivalry describes how organizations are created, managed &
compete within the industry.
Challenges
Competitive environment
The four attributes interact to create the competitive environment in which the
organizations operate.
Prosperity
Organizations prosper particularly with access to specialized assets & skills, best
information, effective management, Investment & innovation.
Even when the four attributes are strong some organizations fail because they either do not
take advantage of opportunities or they possess relatively low levels of skills & resources.
Further attributes
Two further attributes can influence national competitive advantage; chance events an
organizations control (such as technological innovations), & government actions (such as
investment & taxation).
Industry clusters
Audit
The model may be applied to individual industries, organizations or business units in order
to audit strength of the four attributes & so assess competitive advantage.
Strategy review
Strategic alliances
Understanding the model can encourage the formation of strategic alliance between the
industries to improve the state of related & supporting industries.
STRATEGIC MODELS USED IN INDUSTRY ANALYSIS
LOW HIGH
ENTRY BARRIERS
Principle
The model shows how organizations returns vary with the strength of market exit & entry
barriers.
Assumption
The magnitude of organizations returns depends significantly upon the strength of the
market exit & entry barriers.
Elements
Exit barriers
Entry barriers
Economies of scale
Product differentiation
Capital requirement
Supplier switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Challenges
Best position
High entry barriers with low exit barriers can be the best position for the established
organization. In this way high, stable returns can be achieved & unsuccessful firms may
readily exit market.
Worst position
The worst position for organization can be in a market exhibiting low entry barriers & high
exit barriers. New entrants are attracted into the market by upturns in the economy but
cannot leave when conditions deteriorate. This leads to poor profits caused by surplus
capacity.
Applications
Lateral thinking
Understand the model promotes outward thinking & an understanding of the environment
in which the organization operates & competes.
Predicting behavior
The model may be used to predict competitor behavior with regard to a new or existing
market, giving entry & exit barriers.
Selecting markets
The model may be used to help the organization select markets that will give better returns
with the desired order of risk.
Choice of markets
The audit & improved control of entry & exit barrier features impinging upon the
organization gives it a wider choice of markets.
Porter's Five Forces
THREAT
OF NEW
ENTRANT
INDUSTRY
COMPETITIORS
BUYER POWER
RIVALRY AMONG
SUPPLIER POWER
EXISTING FIRMS
THREAT OF
SUBSITUTIO
N
Principle
Porter's 5 forces analysis is a framework for the industry analysis and business strategy development
developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developed in
Industrial Organization (IO) economics1 to derive 5 forces that determine the competitive intensity and
therefore attractiveness of a market. Attractiveness in this context refers to the overall industry
profitability
It is possible to classify forces acting against a firm into five main categories.
Assumption
1
Industrial organization is a field of economics that studies the strategic behavior of firms, the structure of markets
and their interactions.
The five forces can act continuously & adversely against the firm unless it depends itself or influences
them in its favor.
Elements
Potential entrants
These are new players which threaten the livelihood of firms already in the market.
Buyers
Substitutes
These are competitors products (services) which may be alternatives to those supplied by the firm.
Suppliers
Industry competitors
These are firms which compete in the same market & act as rivals to the organization.
Challenges
The effect of the five forces upon organizations may vary depending on the strengths of the firm, the
nature of the sector & the product.
Potential entrants
Buyers
Buyers may try to force down prices whilst requiring better quality or service & may play off competitors
against one another. The influence of buyers groups is greater if:
Buyers decide to manufacture their own supplies & thereby replace the supplier.
Substitutes
The number of perceived substitutes deters existing firms from increasing prices & profits.
Suppliers
Competition
Competitive rivalry may increase where one or more of the competitors are under threat.
Applications
Strategy development
Positioning
Ideally a firm would aim for a position in which it could counter potential competitive forces. It might
also attempt to influence those forces in order to strengthen its position.
The model could be applied in anticipating & exploiting changes in the forces ahead of competitors.
SWOT ANALYSIS
Principle
Assumption
The internal positive & negative attributes of an organization in relation to its external
environment are central to its success.
Elements
Strengths
Weakness
Opportunities
Opportunities are the scope for taking advantage of external possibilities for growth.
Threats
Threats are those external influences which can negatively impact on the organizations
growth.
Challenges
Context
SWOT analysis requires an understanding both of the organizations environment & of its
resources capabilities.
Strengths
An organization can take advantage of strengths for future growth & can use them to better
withstand adverse environmental forces.
Weakness
An organization may move away from activities that involve areas of weakness or may
adopt a strategy to improve in weak areas.
Threats
What may be a threat for one organization would be seen as an opportunity for another.
Analysis
The model tends to be sued for qualitative analysis. Quantitative evaluation enhances its
values.
Other techniques
SWOT would normally be used as part of a process involving other analytical techniques.
Applications
Analysis
Of processes
Strategy formulation
TARGET SEGMENTS
CUSTOMERS
VALU
E
VALUE
COST COMPETITIORS
CORPORATION
PRODUCT/SERVICE
DIFFERENTIATION
Principle
There are three main interest groups in the development of any business strategy. The 3Cs
model points out that a strategist should focus on three key factors for success. In the
construction of a business strategy, three main players must be taken into account:
A. The Corporation
B. The Customer
C. The Competitors
Customers
Clients are the base of any strategy according to Ohmae. Therefore, the primary goal
supposed to be the interest of the customer
Corporation
The Corporation needs strategies aiming to maximize the corporations strengths relative to
the competition in the functional areas that are critical to achieve success in the industry.
This can be achieved by:
Make or buy
Cost-effectiveness
Competitors
Value
This is the benefit added to customers from the corporation & competitors in terms of
quality, service & price.
Cost
The relative costs of production between a corporation & its competitors which may
differentiate the product/service.
Challenges
Performance
Choice of strategists
Strategists are best placed where they are able to deal with all of the organizations key
customer segments, all key functions of the corporation & all the key aspect of competitors.
Choice of strategists
Different strategist may result from focusing on different points of the strategic triangle:
customer, corporation & competitors.
Applications
The market is segmented & changes to product applications, customer mix & other product
attributes may be engineered using this model to satisfy customer trends.
The model may be used to identify, select & sequence key functions in order to optimize.
Differences between the company & its competitors are linked to one or more of the
elements which determine: price, volume or cost. Thus a strategy for achieving a higher
price through a differentiated product may lead to better performance. A powerful image
may be reflected in a price premium.
Functional analysis
The model may be used to analyze the interaction of different functional units within an
organization.
The business portfolio is the collection of businesses and products that make up the
company. The best business portfolio is one that fits the company's strengths and helps
exploit the most attractive opportunities.
(1) Analyze its current business portfolio and decide which businesses should receive more
or less investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio,
whilst at the same time deciding when products and businesses should no longer be
retained.
In each method, the first step is to identify the various Strategic Business Units ("SBU's") in
a company portfolio. An SBU is a unit of the company that has a separate mission and
objectives and that can be planned independently from the other businesses. An SBU can be
a company division, a product line or even individual brands - it all depends on how the
company is organized.
Generic strategies
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 cash to. Since the 1970s, its become much easier to
borrow money cheaply (in many parts of the world) making this less of an issue.
MARKET SHARE
LOW HIGH
HIGH
QUESTION MARKS STARS
MARKET
GROWTH
LOW
DOGS CASH COWS
PRINCIPLE
The BCG matrix method is based on the product life cycle theory that can be used to determine what
priorities should be given in the product portfolio of a business unit. To ensure long-term value
creation, a company should have a portfolio of products that contains both high-growth products in need of
cash inputs and low-growth products that generate a lot of cash. It has 2 dimensions: market share and
market growth. The basic idea behind it is that the bigger the market share a product has or the faster the
product's market grows the better it is for the company.
Elements
Market Share
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.
Market Growth
In these areas, your market presence is weak, so it's going to take a lot of hard work to get
noticed. Also, you won't enjoy the scale economies of the larger players, so it's going to be
difficult to make a profit.
Here, you're well-established, so it's easy to get attention and exploit new opportunities.
However it's only worth expending a certain amount of effort, because the market isn't
growing and your opportunities are limited.
Here you're well-established, and growth is exciting! These are fantastic opportunities, and
you should work hard to realize them.
Question Marks (Problem Child): Low Market Share / High Market Growth
These are the opportunities no one knows what to do with. They aren't generating much
revenue right now because you don't have a large market share. But, they are in high
growth markets so the potential to make money is there.
Challenges
Product position
A company can increase market share & exploit market growth rate in order to move into a
more attractive product position.
Investment
Higher marketing investing would normally be required for question marks (low market
share) than for cash cows or stars.
Experience
The model relates to the experience curve. As experience increases, the model required
amount of investment for product development decreases.
Competition
Applications
Strategy evaluation
Resource allocation
Encouraging growth
Market share & growth rate opportunities may be exploited through product
portfolio planning to aim for stars (high profit), cash cows (cash generation) &
question marks (future cash cows/stars).
As an analysis tool
The model may be used to analyze resources & other organizational factors in addition to
products.
RELATED DIVERSIFICATION GRID
BUSINESS POSITION
HIGH MEDIUM LOW
DIVERSIFICATION
Principle
Assumption
The degree of compatibility of critical success factors between an organization & a target
acquisition will significantly affect the success of the acquisition.
Elements
This occurs when a company expands by entering product markets that call for functional skills
identical to those it already possesses.
Related-complementary diversification(R-CD)
This occurs when a company adds key functional activities & skills to those it already has, but
does not substantially change its final product market.
Challenges
Purpose of acquisition
The purpose of the acquisition should be evaluated & Cleary defined before going ahead.
Related acquisitions
Related acquisitions are normally less problematic than unrelated acquisitions, but the degree &
area of relationship are critical.
Compatibility
A good fit with respect to culture, management style & cash flow between the company & the
target acquisition is essential if the acquisition is to succeed.
Related diversification can result in lower unit costs & improved margins through synergy.
Applications
Strategy development
The model may assist with the development of strategic actions designed to overcome
weakness & or capitalize on strengths the parent company through acquisitions.
Targeting acquisition
The model may help with the identification of candidate acquisitions with high potential
through an analysis of acquiring company strengths.
Portfolio analysis
Analysis of the portfolio of business units of a diversified company is facilitated by the model.
GENERIC STRATEGIES
DIFFERENTAITION COST LEADERSHIP
FOCUS
Principle
Assumption
The organization has sufficient control to be able to make fundamental choices about its
strategic direction. The organization also wishes to grow continuously in a changing &
uncertain environment.
A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's
strengths ultimately fall into one of two headings: cost advantage and differentiation. By
applying these strengths in either a broad or narrow scope, three generic strategies result:
cost leadership, differentiation, and focus. These strategies are applied at the business unit
level. They are called generic strategies because they are not firm or industry dependent.
Elements
Cost leadership
The firms strategy is to minimize costs, giving greater flexibility over pricing decisions.
Differentiation
The firms offer a product or service which is different in some way that is valued by
customers.
Focus
Challenges
Prices
Cost leadership firms may offer average or just below average prices in the industry or
market thereby remaining competitive & gaining high margins.
Flexibility
Cost leadership firms can better cope with cost increases from suppliers & are well placed
to combat entry barriers because of economies of scale.
Development
These include obsolescence & new entrants to the market copying in the leading
organizations processes.
Margins
Differentiation can yield higher margins with which to offset the power of suppliers, & also
reduces the threat posed by substitutes once the customer loyalty is achieved.
Differentiation risks
The cost of remaining differentiated may push prices too high even for loyal customers. As
industries mature, imitations which reduce the perceived differentiation may come on to
market.
This strategy has the elements of cost leadership or of differentiation but relates to a
particular market segment.
Focus risks
The organization may become short-sighted & fail to perceive a broader market
opportunity or equally, concentrate too heavily on a volatile market.
Applications
Cost leadership
Achieving cost leadership includes setting up & implementing an effective cost structure,
competitive pricing & achieving economies of scale.
Differentiation
Focus
A focus strategy helps to determine the specific competitive advantage that may be gained
within a particular market segment.
FOUR ROUTES TO STRATEGIC ADVANTAGE
BUSINESS / PRODUCT OFFERED
OLD/EXISTING NEW/CREATIVE
KFS AGGRESSIVE INTIATIVES
COMPETITVE
WISELY
INTENSIFY FUNCTIONAL
DIFFERENTIATION
ASK WHY-WHY
AVOID HEAD-ON
COMPETITION
EXPLOIT COMPETITIORS
WEAKNESS MAXIMIZE USER BENEFIT
Principle
Improved strategic advantage is a function of the nature of the business or product offered
& the way in which the organization seeks to compete.
Assumptions
A firm would often perform better if it focused its efforts on improving technological &
organizational strengths & satisfying customers rather than on beating its customers.
Elements
Resources are allocated where they will be most effective in relation to the identified key
success factors.
Competitors weaknesses are exploited using new technology or other strengths, such as an
effective sales force.
These include direct competition with the new business or new products.
Challenges
Route 1: KFS
Innovation in products or markets where advantage may be gained can be achieved by first
determining the extent & scope of potential changes that might maximize customer
satisfaction.
Applications
Strategy formulation
The model aids product portfolio planning where customers expectations are
paramount.
Organization may use this model to dissect the market imaginatively in order to identify
key segments, discover the particular strengths of winning companies & analyses
differences from losing companies.
**THE END **