MODULE

BUSINESS POLICY AND STRATEGY

CHAPTER 3
UNDERSTANDING EXISTING STRATEGY

Objectives:
1. Identify what is strategy
2. Explain the porter’s generic business strategies

Before one can identify the adjustments that need to be made to an

organization’s strategy, one must first determine if a strategy truly exists and, if so, be
able to identify the strategy that is in place. Even though many organizations have a
document in place labeled “strategy,” there is no guarantee that the strategy this
document represents has actually been implemented, and even less of a guarantee that
the strategy documented is actually operational.

IDENTIFYING STRATEGIES

The strategist should focus on key areas when attempting to determine the strategy
of a given firm. First, the strategist needs to look at the business the firm is in and
then the industry in which it competes because, to some extent, the business and
industry within which a firm operates determines the corporate strategy required for
survival. Second, it is very helpful to know how the firm prices and markets its
products or services, to whom it markets, and the profile of the customer. Third,
where and how does the firm spend its money? (Many organizations have no clue
where they are spending money, and there is no linkage among projects.) And finally,
what performance measures are held sacred?
MODULE
BUSINESS POLICY AND STRATEGY

PORTER’S GENERIC BUSINESS STRATEGIES

Michael Porter has identified three generic business strategies. His first two
strategies, low-cost leadership and product differentiation, are based on the product’s
appeal to the customer and the firm’s ability to achieve above-industry-norm profits.
The third strategy is known as a focused strategy and is based on the target market,
that is, narrow focus (niche) or broad focus.
Low-Cost Leadership Strategy
Firms that compete in a commodity market seek production efficiencies and low overall
cost structure. Utilizing a cost leadership strategy allows the firm to sell at or around
market price and make above-industry-norm returns because of lower costs. Firms that
adopt this strategy often utilize “operational leverage” to replace people with equipment,
thus replacing a variable labor cost with a more fixed automation cost.

Product Differentiation Strategy

A product differentiation strategy allows a firm to sell at a price higher than the market
price for similar products because the product has been differentiated in some way from
its would-be competitors, and thus it creates a perceived higher value and
corresponding return.

Focused Strategy
A focused strategy is simply the application of one of the above strategies to a niche
market. Within the overall scope of the market, a firm may seek to concentrate on a
particular market segment within which they have found it possible to favorably
compete.
STRATEGIC THRUST
A strategic thrust is an expenditure of funds that establishes the strategic direction of
the firm; it is the new money spent today that determines where the firm will be in the
future. It can be used to reinforce the current strategy or to set a new direction for the
future; in either event, there must be a clear and uncompromised connection to the
enterprise’s mission.
MODULE
BUSINESS POLICY AND STRATEGY

Inappropriate Uses of Strategic Thrust Funds

Many times, CEOs or others with spending authority may utilize strategic thrust funds to
take advantage of short-term opportunities that are not mission related.
VALUE CREATION

The concept of value creation is an expansion of value chain analysis. Value

creation is the process by which the firm transforms its resources from raw inputs into
a product or service that the customer is willing to purchase. The firm must in some
way add value to resource inputs to garner from its customers a price that not only
covers the cost of all of its resource inputs but also generates a surplus that allows it
to sustain itself and prosper. This resembles the “open systems” model of
organizations.
The Sequentially Interdependent System

The open systems concept (Figure 3.1) is a classic value chain. Value addition
begins with the inbound logistics process, progresses through each step of the
transformation process, and ends with the outbound

The Reciprocal Interdependent System

The reciprocal interdependent system utilizes mediating technology to add

value through convenience by facilitating the transaction. Examples
MODULE
BUSINESS POLICY AND STRATEGY

include banking, railroads, finance, and retail organizations. In effect, the organization
that devotes itself to facilitating transactions actually has multiple customer groups.

The Pooled Interdependent System

The pooled interdependent system makes use of intensive technology. Multiple
resources are used in service of the client.
Value Creation Lessons

Understanding the value creation process allows firms to deploy their limited
resources where they will create the most value for the customer and, in turn,
generate maximum profits for the firm. This knowledge provides the direction needed
to strategically align the organization and insure the future. Thus summarizing:

■ Regardless of the value creation system in place, care should be taken when
investing resources in non-value-creating activities because, regardless of the
internal benefits received from these activities, they are not part of the product
or service being purchased by the customer who will not knowingly pay for
these activities.
■ In a sequential organization, serving the next person in the line is the
goal; technology is long-linked. Teamwork is necessary only

CORE TECHNOLOGY
Core technology refers to how an organization accomplishes its value creation activities.
It deals with the transformation of inputs to outputs — not computers, electronics, or
networks. Usually, large organizations are likely to employ all three types of
technologies in different areas, but primarily add value to the customer via one model.

CORE BUSINESS
The core business is exactly what its name implies — identifying the type of business in
which an organization wants to be involved. Successfully identifying an organization’s
core business is vital to the success of that organization.
MODULE
BUSINESS POLICY AND STRATEGY

CORE COMPETENCY
In general terms, a business’ core competency is an internal organizational process that
allows it to successfully compete. It may or may not be a distinctive competency
dependent on the capabilities of its competitors.

INTERNAL RESOURCE AUDIT

Conducting an internal resource audit is critical to being able to analyze external
opportunities and threats that come from neutral external events. The difference
between the two is in how the company handles the events.
RESOURCE BASED VIEW (RBV) OF ORGANIZATIONS

The RBV is a relatively recent approach to strategy development and requires the
strategist to view organizations as a collection of resources. This approach requires
that resources be identified and evaluated. Four broad categories of resources are
possessed by organizations; they are:
1. Physical — property, plant, and equipment (anything tangible)
2. Human — people
3. Financial — money that is available to the organization
4. Organizational — all of the intangible resources (culture, various systems,
morale, patents, intellect)
OUTSOURCING
Those aspects of the organization that are not considered core compe- tencies may be
good candidates for outsourcing. Outsourcing can be defined as a strategic decision to
obtain goods or services from an outside agency versus making or providing the goods
or services within the organization. Outsourcing is usually met with opposition in many
orga- nizations because it is often associated with the loss of jobs.

For further discussion please refer to the link provided: IDENTIFYING STRATEGIES

https://www.youtube.com/watch?v=WkJWwyBwd8Q
For further discussion please refer to the link provided PORTER’S GENERIC BUSINESS STRATEGIES

https://www.youtube.com/watch?v=mZeNOaO3Pzk

Reference:
Business Policy And Strategy 7th Edition