2 b strategies

7/29/2019 2 b Strategies

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2 b Strategies, policies, and planning premises

Strategies

The term 'Strategy' has been adapted from war and is being increasingly used in business toreflect broad overall objectives and policies of an enterprise

Edmund P Learned has defined strategies as "the pattern of objectives, purposes or goalsand major policies and plans for achieving these goals, stated in such a way as to define

what business the company is in or is to be and the kind of company it is or is to be".

According to Koontz and O' Donnell , "Strategies must often denote a general programme of action

and deployment of emphasis and resources to attain comprehensive objectives".

Strategy is the determination of the mission (or the fundamental purpose) and the basiclong-term objectives of an enterprise, and the adoption of courses of action and allocation

of resources necessary to achieve these aims

Policies are general statements or understandings that guide managers' thinking in decisionmaking

The Strategic Planning Process

1. Inputs to the organization2. Industry Analysis3.

Enterprise Profile


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4. Orientation, Values, and Vision5. Mission (Purpose), Major Objectives, and Strategic Intent6. Present and Future External Environment7. Internal Environment8. Development of Alternative Strategies9. Evaluation and Choice of Strategies10.Medium- and Short-Range Planning11. Implementation through Reengineering, Staffing, Leadership, and Control12.Consistency Testing and Contingency Planning

Characteristics of Strategy

(1) It is the right combination of different factors.

(2) It relates the business organisation to the environment.

(3) It is an action to meet a particular challenge, to solve particular problems or to

attain desired objectives.

(4) Strategy is a means to an end and not an end in itself.

(5) It is formulated at the top management level.

(6) It involves assumption of certain calculated risks.

Business Strategy

Seymour Tiles offers six criteria for evaluating an appropriate strategy.

1. Internal consistency: The strategy of an organisation must be consistent with its otherstrategies, goals, policies and plans.

2. Consistency with the environment: The strategy must be consistent with the externalenvironment. The strategy selected should enhance the confidence and capability of the

enterprise to manage and adapt with or give command over the environmental forces.

3. Realistic Assessment: Strategy needs a realistic assessment of the resources of theenterprisemen, money and materialsboth existing resources as also the resources,

the enterprise can command.

4. Acceptable degree of risk: Any major strategy carries with it certain elements of riskand uncertainty. The amount of risk inherent in a strategy should be within the bearable


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capacity of the enterprise.

5. Appropriate time: Time is the essence of any strategy. A good strategy not only providesthe objectives to be achieved but also indicates when those objectives could be achieved.

6. Workability: Strategy must be feasible and should produce the desired results.Strategy Formulation

There are three phases in strategy formation

1. Determination of objectives.2. Ascertaining the specific areas of strengths and weakness in the total environment.3. Preparing the action plan to achieve the objectives in the light of environmental forces.

Strategic PlansAre organization-wide, establish overall objectives, and position an organization in terms ofits environment.

Tactical PlansSpecify the details of how an organizations overall objectives are to be achieved.

Short-term PlansCover less than one year.

Long-term PlansExtend beyond five years.

Strategic Plans Apply broadly to the entire organization. Establish the organizations overall objectives. Seek to position the organization in terms of its environment. Provide direction to drive an organizations efforts to achieve its goals. Serve as the basis for the tactical plans. Cover extended periods of time. Are less specific in their details.

Tactical Plans (Operational Plans) Apply to specific parts of the organization.

Are derived from strategic objectives. Specify the details of how the overall objectives are to be achieved. Cover shorter periods of time. Must be updated continuously to meet current challenges.

Specific and Directional Plans

Specific Plans Clearly defined objectives and leave no room for misinterpretation.

What, when, where, how much, and by whom (process-focus) Directional Plans

Are flexible plans that set out general guidelines. Go from here to there (outcome-focus)

Single-Use Plan


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Is used to meet the needs of a particular or unique situation. Single-day sales advertisement

Standing Plan Is ongoing and provides guidance for repeatedly performed actions in an

organization.

Customer satisfaction policy

Strategic Management

Art & science offormulating, implementing, and evaluating, cross-functional decisions thatenable an organization to achieve its objectives

To exploit and create new and different opportunities for tomorrow

In essence, the strategic planis a companys game plan

Elements Of Strategic Management,as minimum, includes1. strategic planning2. strategic control

Terms In Strategic Management

Purpose :purpose outlines why the organization exists; it includes a description of itscurrent and future business (Leslie W. Rue)

Mission :The mission of an organization is the unique reason for its existence that sets it

apart from all others (A. James, F. Stoner). The organization's mission describes why the

organization exists and guides what it should be doing.

Goals :A goal is a desired future state that the organization attempts to realize (AmitaiEtzioni).

Objectives : Objectives refer to the specific kinds of results the organizations seek to achievethrough its existence and operations (William F. Glueck)

Strategy : The role of strategy is to identify the general approaches that the organizationutilize to achieve its organizational objectives.

Tactics : are specifics actions the organization might undertake in carrying its strategy Policy : "Policies are guide to action. They include how resources are to be allocated and

how tasks assigned to the organization might be accomplished ... (William F. Glueck, and

Lawrence R. Jauch " .Policies include guidelines, procedures, rules, programs, and budgets

established to support efforts to achieve stated objectives


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Strategists

Strategists are the individuals who are involved in the strategic management process. the people responsible for major strategic decisions are the board of director, president,

the chief executive officer, the chief operating officer, and the division managers.

3 Stages of the Strategic Management Process

Strategy formulation Strategy implementation Strategy evaluation

Issues in Strategy Formulation

Businesses to enter Businesses to abandon Allocation of resources Expansion or diversification International markets Mergers or joint ventures Avoidance of hostile takeover


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Developing a strategy-supportive culture Creating an effective organizational structure Redirecting marketing efforts Preparing budgets Developing and utilizing information systems Linking employee compensation to organizational performance Action Stage of Strategic Management

Mobilization of employees & managers Most difficult stage Interpersonal skills critical

HIERARCHY OF COMPANY STRATEGIESThe corporate-level strategy. Executives craft the overall strategy for a diversified

company

Business strategies are developed usually by the general manager of a business unit

Functional strategies. The aim is to support the business and corporate strategies.


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Implementation is the process that turns strategies and plans into actions in order toaccomplish strategic objectives and goals.

Implementing your strategic plan is as important, or even more important, than yourstrategy

According to a Fortune cover story in 1999, nine out of ten organizations fail to implementtheir strategic plan for many reasons:

60% of organizations dont link strategy to budgeting 75% of organizations dont link employee incentives to strategy 86% of business owners and managers spend less than one hour per month

discussing strategy

95% of a typical workforce doesnt understand their organizations strategy


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THE HARD Ss

Strategy: the direction and scope of the company over the long term.

Structure: the basic organization of the company, its departments, reporting lines, areas of expertise

and responsibility (and how they inter-relate).

Systems: formal and informal procedures that govern everyday activity, covering everything from

management information systems, through to the systems at the point of contact with the customer

(retail systems, call center systems, online systems, etc).

THE SOFT Ss

Skills: the capabilities and competencies that exist within the company. What it does best.

Shared values: the values and beliefs of the company. Ultimately they guide employees towards

'valued' behavior.

Staff: the company's people resources and how the are developed, trained and motivated.

Style: the leadership approach of top management and the company's overall operating approach.

Eight Actions of Implementing Strategy

1. Build an Organization2. Marshal resources3. Institute policies4. Pursue best practices and continuous improvement5. Information and operating systems6. Tying rewards to strategy and goals7. Shape corporate culture8. Exert leadership

Building a Capable organization

Staffing Build core competencies Develop an appropriate organizational structure


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Staffing

Find the right people Background, experience, values, personality and management style

Build core competencies Find out what competencies ae needed Develop the ability to do something Hone skills with experience

Build appropriate structure Structure must support strategy What value chain activities should be performed inside the company and which

outside

Structure internal organization around core value chain activities.- what we do well How much centralization and decentralization Dont build walls Link to suppliers and strategic allies

Marshal Resources Move resources to areas where the strategy requires Insure ther are enough resources to fund new initiatives Reduce resources where not needed


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Internal analysis

To identify Strengths to build on Weaknesses to overcome

To find where it stands in terms of Resources, strengths and weaknesses To exploit Opportunities that are inline with its capabilities To assess capability gaps

Resources

Tangible & intangible X capabilities = competencies ----- competitive advantage Resources Assets & Skills Assets Tangible & intangible Tangible Financial, organizational and physical Intangible Human resource, organizational, innovative, reputational, informational,

technological

Capability and Competency

Capability = ability to bundle resources to perform an activity C = (TA+IA+S) Competency = ability of an organization to achieve its purpose Core Competency = certain activities that can be performed exceptionally well compared to

competitors

Core competencies A well-performed internal activity that is central,not peripheral, to a companys

strategy, competitiveness, and profitability

Major value-creating skills and capabilities that are shared across multiple product lines or multiple businesses Results from the collaboration among different parts of an organization

Gives a company a potentially valuable competitive capability


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Tools for I A

SWOT analysis Value chain analysis Financial analysis Key factor rating Functional area profile Strategic advantage profile


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The TOWS Matrix is a conceptual framework for a systematic analysis that facilitates matching the

external threats and opportunities with the internal weaknesses and strengths of the organization


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4 Alternative Strategies

SO strategy: Maxi Maxi WO strategy: Mini Maxi ST strategy: Maxi Mini WT strategy: Mini - Mini


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Identifying External Threats to Profitability and Competitiveness

Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors Onerous regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval in a country


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THE VALUE CHAIN

A TOOL DEVELOPED BY DR. MICHAEL PORTER OF HARVARD BUSINESS SCHOOL CAN BE USED TO EXAMINE THE VARIOUS ACTIVITIES OF THE FIRM AND HOW THEY INTERACT

IN ORDER TO PROVIDE A SOURCE OF COMPETITIVE ADVANTAGE BY:

- PERFORMING THESE ACTIVITIES BETTER OR

- AT A LOWER COST THAN THE COMPET ITORS

TYPES OF FIRM ACTIVITIES

1. PRIMARY :

- THOSE THAT ARE INVOLVED IN THE CREATION, SALE AND TRANSFER OF PRODUCTS (INCLUDING

AFTER-SALES SERVICE)

- INBOUND LOGISTICS:

CONCERNED WITH RECEIVING, STORING, DISTRIBUTING INPUTS

(e.g. HANDLING OF RAW MATERIALS, WAREHOUSING, INVENTORY CONTROL)

- OPERATIONS

COMPRISE THE TRANSFORMATION OF THE INPUTS INTO THE FINAL PRODUCT FORM

(E.G. PRODUCTION, ASSEMBLY, AND PACKAGING)

- OUTBOUND LOGISTICS - INVOLVE THE COLLECTING, STORING, AND DISTRIBUTING THE

PRODUCT TO THE BUYERS

(e.g. PROCESSING OF ORDERS, WAREHOUSING OF FINISHED GOODS, AND DELIVERY)


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- MARKETING AND SALES : - HOW BUYERS CAN BE CONVINCED TO PURCHASE THE PRODUCT

(e.g. ADVERTISING, PROMOTION, DISTRIBUTION)

- SERVICE : INVOLVES HOW TO MAINTAIN THE VALUE OF THE PRODUCT AFTER IT IS PURCHASED

(e.g. INSTALLATION, REPAIR, MAINTENANCE, AND TRAINING)

2. SUPPORT

- THOSE THAT MERELY SUPPORT THE PRIMARY ACTIVITIES

PROCUREMENT: -CONCERNED WITH THE TASKS OF PURCHASING INPUTS SUCH AS RAWMATERIALS, EQUIPMENT, AND EVEN LABOR

- TECHNOLOGY DEVELOPMENTo THESE ACTIVITIES ARE INTENDED TO IMPROVE THE PRODUCT AND THE PROCESS,o CAN OCCUR IN MANY PARTS OF THE FIRM

. HUMAN RESOURCE MANAGEMENTo INVOLVED IN RECRUITING, HIRING, TRAINING,DEVELOPMENT AND

COMPENSATION

FIRM INFRASTRUCTURE: - THE ACTIVITIES WHICH ARE NOT SPECIFIC TO ANY ACTIVITY AREASUCH AS GENERAL MANAGEMENT, PLANNING, FINANCE, AND ACCOUNTING ARE

CATEGORIZED UNDER FIRM INFRASTRUCTURE.

USES OF VALUE CHAIN ANALYSIS

THE SOURCES OF THE COMPETITIVE ADVANTAGE OF A FIRM CAN BE SEEN FROM ITSDISCRETE ACTIVITIES AND HOW THEY INTERACT WITH ONE ANOTHER.

THE VALUE CHAIN IS A TOOL FOR SYSTEMATICALLY EXAMINING THE ACTIVITIES OF A FIRMAND HOW THEY INTERACT WITH ONE ANOTHERAND AFFECT EACH OTHERS COST AND

PERFORMANCE

A FIRM GAINS A COMPETITIVE ADVANTAGE BY PERFORMING THESE ACTIVITIES BETTER ORAT LOWER COST THAN COMPETITORS.

THE VALUE IS THE TOTAL AMOUNT (i.e. TOTAL REVENUE) THAT BUYERS ARE WILLING TOPAY FOR A FIRMS PRODUCTS

THE DIFFERENCE BETWEEN THE TOTAL VALUE (OR REVENUE) AND THE TOTAL COST OFPERFORMING ALL OF THE FIRMS ACTIVITIES PROVIDES THE MARGIN

EVERY ACTIVITY THAT IS DONE BY A FIRM NEEDS TO BE CAPTURED IN A PRIMARY ORSUPPORT ACTIVITY.


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ANALYZING THE CHAIN

COVER THE ENTIRE COST STRUCTURE OF THE COMPANY BE SURE TO INCLUDE THE SUB-CONTRACTED OR OUTSOURCED PORTIONS

LINKAGES WITHIN THE VALUE CHAIN

NOT JUST A COMPILATION OF ACTIVITIES THAT ARE INDEPENDENT OF EACH OTHER; INSTEAD, IT IS A SYSTEM OF ACTIVITIES THAT ARE INTERDEPENDENT BECAUSE THEY ARE

RELATED BY THEIR LINKAGES.

THROUGH THE LINKAGES, THE PERFORMANCE OF ONE ACTIVITY AFFECTS THE COST ORPERFORMANCE OF ANOTHER.

THESE LINKAGES BETWEEN THE ACTIVITIES SUGGEST THAT THE COST ADVANTAGE OR THEDIFFERENTIATION OF A FIRM WOULD DEPEND NOT JUST ON THE COST REDUCTION OR

PERFORMANCE IMPROVEMENT OF AN INDIVIDUAL ACTIVITY.

DO NOT JUST LOOK AT EACH ACTIVITY INDEPENDENTLY THE LINKAGES BETWEEN THE ACTIVITIES CAN BE IDENTIFIED BY SEARCHING FOR WAYS IN

WHICH EACH VALUE ACTIVITY AFFECTS OR IS AFFECTED BY OTHERS.

OPTIMIZATION AND COORDINATION BETWEEN THE VARIOUS ACTIVITIES OF THE FIRM CANBE ACHIEVED BY EXPLOITING THESE LINKAGES.

VERTICAL LINKAGES

LINKAGES CAN ALSO EXIST OUTSIDE THE FIRM; FOR INSTANCE THERE IS A LINKAGEBETWEEN A FIRMS CHAIN AND THE VALUE CHAIN OF ITS SUPPLIERS AND CHANNELS.

e.g. THE ACTIVITIES OF THE RAW MATERIALS SUPPLIERS AFFECT THE ACTIVITIES OF THEFIRM. SIMILARLY, THE ACTIVITIES OF THE DISTRIBUTOR ALSO AFFECT THE FIRM.

THESE LINKAGES CAN PROVIDE OPPORTUNITIES FOR THE FIRM TO ENHANCE ITSCOMPETITIVE ADVANTAGE.

THE VALUE CHAIN OF A FIRM IS A PART OF THE VALUE SYSTEM, WHICH IS THE LARGERSTREAM OF ACTIVITIES FROM SUPPLIERS TO BUYERS.

BECAUSE OF THE INTERACTIONS BETWEEN THEM, THE SUPPLIERS AND EVEN THE CHANNELSAFFECT A COMPANYS VALUE CHAIN.

THE PRODUCT OF A FIRM REPRESENTS A PURCHASED INPUT TO THE BUYERS CHAIN. DIFFERENTIATION CAN RESULT FROM HOW A FIRMS VALUE CHAIN RELATES TO THE VALUE

CHAIN OF ITS BUYER


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VALUE IS CREATED WHEN A FIRM CREATES COMPETITIVE ADVANTAGE FOR ITS BUYER. A FIRM CAN ALSO ENTER INTO COALITIONS WITH INDEPENDENT FIRMS TO ACHIEVE

BENEFITS FROM THE LINKAGES AMONG THEIR VARIOUS VALUE CHAINS.

EXAMPLES OF SUCH COALITIONS ARE TECHNOLOGY LICENSES AND JOINT VENTURES.DEFINE THE BUSINESS UNIT IN WHICH THE VALUE CHAIN WOULD BE OPTIMAL FOR THE

FIRM

e.g. EXPORT SALES DIVISION vs. LOCAL SALES DIVISION

SINCE THE APPLICATION OF THE VALUE CHAIN ANALYSIS TO AN INDUSTRY WILL LIKELY BLUR

OR HIDE THESE SOURCES OF COMPETITIVE ADVANTAGE, DR. PORTER THEREFORE SUGGESTS

THAT:

THE BUSINESS UNIT IS THE CORRECT LEVEL TO CONSTRUCT A VALUE CHAIN

AND THE APPLICATION TO AN ENTIRE SECTOR OR INDUSTRY IS NOT RECOMMENDED.

NEVERTHELESS, VALUE CHAIN ANALYSIS ON AN INDUSTRY LEVEL HAS BEEN PERFORMED IN

NUMEROUS INDUSTRY STUDIES ALL OVER THE WORLD.

THE PEARL 2 PROJECT HAS, THEREFORE, DECIDED TO UTILIZE THE VALUE CHAIN ANALYSIS IN

THE VARIOUS STATE-OF-THE SECTOR REPORTS


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Monte Carlo Analysis

Introduction

Having being named after the principality famous for its casinos, the term Monte Carlo

Analysis conjures images of an intricate strategy aimed at maximizing one.s earnings in a

casino game.

However Monte Carlo Analysis refers to a technique in project management where a

manager computes and calculates the total project cost and the project schedule many

times.

This is done using a set of input values that have been selected after careful deliberation of

probability distributions or potential costs or potential durations.

Importance of the Monte Carlo Analysis

The Monte Carlo Analysis is important in project management as it allows a project manager

to calculate a probable total cost of a project as well as to find a range or a potential date of

completion for the project.

Since a Monte Carlo Analysis uses quantified data, this allows project managers to better

communicate with senior management, especially when the latter is pushing for impractical

project completion dates or unrealistic project costs.

Also, this type of an analysis allows the project managers to quantify perils and ambiguitiesin project schedules.

A Simple Example of the Monte Carlo Analysis

A project manager creates three estimates for the duration of the project: one being the

most likely duration, one the worst case scenario and the other being the best case scenario.

For each estimate, the project manager consigns the probability of occurrence.

The project is one that involves three tasks.

1. The first task is likely to take three days (70% probability), but it can also be completed intwo days or even four days. The probability of it taking two days to complete is 10% percent

and the probability of it taking four days to finish is 20% percent.

2. The second task has a 60% percent probability of taking six days to finish, a 20% percentprobability each of being completed in five days or eight days.

3. The final task has an 80% percent probability of being completed in four days, 5% percentprobability of being completed in three days and a 15% percent probability of being

completed in five days.


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Using the Monte Carlo Analysis, a series of simulations are done on the project probabilities.

The simulation is to run for a thousand odd times and for each simulation, an end date is

noted.

Once the Monte Carlo Analysis is completed, there would be no single project completion

date. Instead the project manager has a probability curve depicting the likely dates ofcompletion and the probability of attaining each.

Using this probability curve, the project manager informs the senior management of the

expected date of completion. The project manager would choose the date with a ninety

percent chance of attaining it.

Therefore it could be said that, using the Monte Carlo Analysis, the project has a ninety

percent chance of being completed in x number of days.

Similarly, a project manager can adjudge the estimated budget for a project using

probabilities to simulate different end results and in turn use the findings in a probability

curve.

How is the Monte Carlo Analysis Carried Out?

The above example was one that contained a mere three tasks. In reality, such projects

contain hundreds if not thousands of tasks.

Using the Monte Carlo Analysis, a project manager is able to derive a probability curve to

show the ambiguity surrounding the duration and the costs surrounding these hundreds or

thousands of tasks.

Conducting simulations involving hundreds or thousands of tasks is a tedious job to be done

manually.

Today there is project management scheduling software that can conduct thousands of

simulations and offer the project manager different end results in a probability curve.

The Different Types of Probability Distributions/Curves

A Monte Carlo Analysis shows the risk analysis involved in a project through a probability

distribution that is a model of possible values.

Some of the commonly used probability distributions or curves for Monte Carlo Analysis

include:

The Normal or Bell Curve: In this type of probability curve, the values in the middle are thelikeliest to occur.

The Lognormal Curve: Here values are skewed. A Monte Carlo Analysis gives this type ofprobability distribution for project management in the real estate industry or oil industry.


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The Uniform Curve: All instances have an equal chance of occurring. This type of probabilitydistribution is common with manufacturing costs and future sales revenues for a new

product.

The Triangular Curve: The project manager enters the minimum, maximum or most likelyvalues. The probability curve, a triangular one, will display values around the most likelyoption.

Conclusion

The Monte Carlo Analysis is an important method adopted by managers to calculate the

many possible project completion dates and the most likely budget required for the project.

Using the information gathered through the Monte Carlo Analysis, project managers are

able to give senior management the statistical evidence for the time required to complete a

project as well as propose a suitable budget.


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Business Portfolio Matrix

A company may have multiple business units (SBUs) that in turn have several product lines

composed of multiple products with variants (items, SKUs). The portfolio matrix is most applicable

at the corporate level (which SBUs?), and at the SBU level (which product lines?)and is often useful

for sorting markets, e.g. regional geographic markets with different characteristics.

The essence of the strategic portfolio matrix is that businesses, products, and markets can be

categorized along variants of two fundamental dimensions: marketattractiveness and relative

businessstrength . For example, the pioneering BCG matrix categorizes businesses based on

relative market share (a proxy for business strength) and market growth (a selective measure of

market attractiveness). The popular GE / McKinsey matrix sorts by multi-factor consolidated

measures of business strength and market attractiveness.

Ultimately, market attractiveness is a calibration of the size of the prospective profit pool available in

the market. In effect, it is an analytical assessment of the industry's aggregatePLC profit peak.

The portfolio framework can be reduced to a very simple resource allocation principle: companies

should invest in products that have large prospective profit pools (the ultimate measure of market

attractiveness), and for which the company has an existing or potential competitive advantage that

enables it to capture a meaningful share of the profit pool.

At the opposite end of the continuum are unattractive markets where a company has no particular

competitive strength. These are small or declining markets that should be avoided. If the company

has legacy products in this category, they should be harvested (i.e. cut costs and raise prices to

maximize profit) or, if unprofitable, divested.
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The most questionable products are in attractive markets where the company has a weak or

unestablished competitive position. Action must be taken to strengthen (develop) the competitive

position (moving the business to the invest / grow quadrant) or the company should cut its losses

and withdraw.

The fourth category is comprised of markets where the company is competitively strong but themarket is unattractive. In these cases, "attractive" may be in the eyes of the beholder. The

aggregate markets may be mature or declining, discouraging participation by most companies. But,

the markets may still be profitable, especially for companies with strong established positions (i.e.

high share, low costs). These companies should maintain their positions and protect the profits and

cash flow generated by the businesses.

Further, the initial sorting and categorization is a static representation. But, markets and

competitive positions are dynamic. Markets are always changing (e.g. growing or declining,

becoming more or less profitable), and competitive positions can be changed via strategic and

tactical initiatives. Projecting these dynamics is fundamental to effective portfolio management.


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The business portfolio is the collection of businesses and products that make up the company. Thebest business portfolio is one that fits the company's strengths and helps exploit the most attractive

opportunities.

The company must:

(1) Analyse 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.

The two best-known portfolio planning methods are theBoston Consulting Group Portfolio Matrix

and the McKinsey / General Electric Matrix (discussed in this revision note). In both methods, 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 plannedindependently 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 organised.

The McKinsey / General Electric Matrix

The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly, market

attractiveness replaces market growth as the dimension of industry attractiveness, and includes a

broader range of factors other than just the market growth rate. Secondly, competitive strength

replaces market share as the dimension by which the competitive position of each SBU is assessed.

The diagram below illustrates some of the possible elements that determine market attractiveness

and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:
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Factors that Affect Market Attractiveness

Whilst any assessment of market attractiveness is necessarily subjective, there are several factors

which can help determine attractiveness. These are listed below:

- Market Size- Market growth

- Market profitability

- Pricing trends

- Competitive intensity / rivalry

- Overall risk of returns in the industry

- Opportunity to differentiate products and services

- Segmentation

- Distribution structure (e.g. retail, direct, wholesale

Factors that Affect Competitive Strength

Factors to consider include:

- Strength of assets and competencies

- Relative brand strength

- Market share

- Customer loyalty

- Relative cost position (cost structure compared with competitors)

- Distribution strength

- Record of technological or other innovation

- Access to financial and other investment resources


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Porter's Five Forces Model: analysing industry structure

Author:Jim Riley Last updated: Wednesday 24 October, 2012

Overview of the Five Forces Model

Porter identified five factors that act together to determine the nature of competition within an

industry. These are the:

Threat of new entrants to a market Bargaining power of suppliers Bargaining power of customers (buyers) Threat of substitute products Degree of competitive rivalry

He identified that high or low industry profits (e.g. soft drinks v airlines) are associated with the

following characteristics:
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Lets look at each one of the five forces in a little more detail to explain how they work.

Threat of new entrants to an industry

If new entrants move into an industry they will gain market share & rivalry will intensify The position of existing firms is stronger if there are barriers to entering the market Ifbarriers to entry are low then the threat of new entrants will be high, and vice versa

Barriers to entry are, therefore, very important in determining the threat of new entrants. An

industry can have one or more barriers. The following are common examples of successful barriers:

Barrier Notes

Investment cost High cost will deter entry

High capital requirements might mean that only large

businesses can compete

Economies of scaleavailable to existing firms

Lower unit costs make it difficult for smaller newcomers tobreak into the market and compete effectively

Regulatory and legal

restrictions

Each restriction can act as a barrier to entry

E.g. patents provide the patent holder with protection, at

least in the short run

Product differentiation

(including branding)

Existing products with strong USPs and/or brand increase

customer loyalty and make it difficult for newcomers to

gain market share


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Access to suppliers and

distribution channels

A lack of access will make it difficult for newcomers to

enter the market

Retaliation by established

products

E.g. the threat of price war will act to discourage new

entrantsBut note that competition law outlaws actions like

predatory pricing

What makes an industry easy or difficult to enter? The following table helps summarise the issues

you should consider:

Easy to Enter Difficult to Enter

Common technology

Access to distribution channels

Low capital requirements

No need to have high capacity and output

Absence of strong brands and customer

loyalty

Patented or proprietary know-how

Well-established brands

Restricted distribution channels

High capital requirements

Need to achieve economies of scale for

acceptable unit costs

Bargaining power of suppliers

If a firms suppliers have bargaining power they will:

Exercise that power Sell their products at a higher price Squeeze industry profits

If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more

powerful the customer (buyer), the lower the price that can be achieved by buying from them.

Suppliers find themselves in a powerful position when:

There are only a few large suppliers The resource they supply is scarce The cost of switching to an alternative supplier is high The product is easy to distinguish and loyal customers are reluctant to switch The supplier can threaten to integrate vertically The customer is small and unimportant There are no or few substitute resources available

Just how much power the supplier has is determined by factors such as:


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Factor Note

Uniqueness of the input

supplied

If the resource is essential to the buying firm and no close

substitutes are available, suppliers are in a powerful

position

Number and size of firms

supplying the resources

A few large suppliers can exert more power over market

prices that many smaller suppliers each with a small

market share

Competition for the input

from other industries

If there is great competition, the supplier will be in a

stronger position

Cost of switching to

alternative sources

A business may be locked in to using inputs from

particular suppliers e.g. if certain components or raw

materials are designed into their production

processes. To change the supplier may mean changing a

significant part of production

Bargaining power of customers

Powerful customers are able to exert pressure to drive down prices, or increase the required quality

for the same price, and therefore reduce profits in an industry.

A great example in the UK currently is the dominant grocery supermarkets which are able exert

great power over supply firms. You can see a great video about this issue here.

Several factors determine the bargaining power of customers, including:

Factor Note

Number of customers The smaller the number of customers, the greater their

power

Their size of their orders The larger the volume, the greater the bargaining power

of customers

Number of firms supplying

the product

The smaller the number of alternative suppliers, the less

opportunity customers have for shopping around

The threat of integrating

backwards

If customers pose a threat of integrating backwards they

will enjoy increased power

The cost of switching Customers that are tied into using a suppliers products
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(e.g. key components) are less likely to switch because

there would be costs involved

Customers tend to enjoy strong bargaining power when:

There are only a few of them The customer purchases a significant proportion of output of an industry They possess a credible backward integration threat that is they threaten to buy the

producing firm or its rivals

They can choose from a wide range of supply firms They find it easy and inexpensive to switch to alternative suppliers

Threat of substitute products

A substitute product can be regarded as something that meets the same need

Substitute products are produced in a different industrybut crucially satisfy the same customer

need. If there are many credible substitutes to a firms product, they will limit the price that can be

charged and will reduce industry profits.

As an example, consider the many substitutes that consumers now have to buying a newspaper for

their news

The extent of the threat depends upon

The extent to which the price and performance of the substitute can match the industrysproduct

The willingness of customers to switch Customer loyalty and switching costs

If there is a threat from a rival product the firm will have to improve the performance of their

products by reducing costs and therefore prices and by differentiation.

Degree of competitive rivalry

If there is intense rivalry in an industry, it will encourage businesses to engage in

Price wars (competitive price reductions), Investment in innovation & new products Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits.

Several factors determine the degree of competitive rivalry; the main ones are:


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Factor Note

Number of competitors in the

market

Competitive rivalry will be higher in an industry

with many current and potential competitors

Market size and growth

prospects

Competition is always most intense in stagnating

markets

Product differentiation and

brand loyalty

The greater the customer loyalty the less intense

the competition

The lower the degree of product differentiation

the greater the intensity of price competition

The power of buyers and the

availability of substitutes

If buyers are strong and/or if close substitutes are

available, there will be more intense competitive

rivalry

Capacity utilisation The existence of spare capacity will increase the

intensity of competition

The cost structure of the

industry

Where fixed costs are a high percentage of costs

then profits will be very dependent on volume

As a result there will be intense competition over

market shares

Exit barriers If it is difficult or expensive to exit an industry,

firms will remain thus adding to the intensity of

competition


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PEST Analysis


PEST analysis is concerned with the key external environmental influences on a business.

The acronym stands for the Political, Economic, Social and Technological issues that could affect the

strategic development of a business.

Identifying PEST influences is a useful way of summarising the external environment in which a

business operates. However, it must be followed up by consideration of how a business should

respond to these influences.

The table below lists some possible factors that could indicate important environmental influences

for a business under the PEST headings:

Political / Legal Economic Social Technological

Environmental

regulation and

protection

Economic growth

(overall; by industry

sector)

Income distribution

(change in distribution

of disposable income;

Government spending

on research

Taxation (corporate;

consumer)

Monetary policy (interest

rates)

Demographics (age

structure of the

population; gender;

family size and

composition; changing

nature of occupations)

Government and

industry focus on

technological effort

International trade

regulation

Government spending

(overall level; specific

spending priorities)

Labour / social mobility New discoveries and

development

Consumer protection Policy towards

unemployment

(minimum wage,

unemployment benefits,

grants)

Lifestyle changes (e.g.

Home working, single

households)

Speed of technology

transfer

Employment law Taxation (impact on

consumer disposable

income, incentives to

invest in capital

equipment, corporation

tax rates)

Attitudes to work and

leisure

Rates of technological

obsolescence


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Government

organisation /

attitude

Exchange rates (effects

on demand by overseas

customers; effect on cost

of imported components)

Education Energy use and costs

Competition

regulation

Inflation (effect on costs

and selling prices)

Fashions and fads Changes in material

sciences

Stage of the business

cycle (effect on short-

term business

performance)

Health & welfare Impact of changes in

Information technology

Economic "mood" -

consumer confidence

Living conditions

(housing, amenities,

pollution)

Internet!


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Core Competencies


Introduction

Core competencies are those capabilities that are critical to a business achieving competitive

advantage. The starting point for analysing core competencies is recognising that competition

between businesses is as much a race for competence mastery as it is for market position and

market power. Senior management cannot focus on all activities of a business and the competencies

required to undertake them. So the goal is for management to focus attention on competencies that

really affect competitive advantage.

Core Competencies are not seen as being fixed. Core Competencies should change in response to

changes in the company's environment. They are flexible and evolve over time. As a business evolves

and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and

change.

Identifying Core Competencies

Prahalad and Hamel suggest three factors to help identify core competencies in any business:

What does the Core

Competence

Achieve?

Comments / Examples

Provides potential

access to a wide

variety of markets

The key core competencies here are those that enable the creation of new

products and services.

Example: Why has Saga established such a strong leadership in supplying

financial services (e.g. insurance) and holidays to the older generation?

Core Competencies that enable Saga to enter apparently different markets:

- Clear distinctive brand proposition that focuses solely on a closely-defined

customer group

- Leading direct marketing skills - database management; direct-mailing

campaigns; call centre sales conversion

- Skills in customer relationship management

Makes a significant

contribution to the

perceived customer

benefits of the end

product

Core competencies are the skills that enable a business to deliver a

fundamental customer benefit - in other words: what is it that causes

customers to choose one product over another? To identify core

competencies in a particular market, ask questions such as "why is the

customer willing to pay more or less for one product or service than

another?" "What is a customer actually paying for?


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Example: Why have Tesco been so successful in capturing leadership of the

market for online grocery shopping?

Core competencies that mean customers value the Tesco.com experience so

highly:

- Designing and implementing supply systems that effectively link existing

shops with the Tesco.com web site

- Ability to design and deliver a "customer interface" that personalises online

shopping and makes it more efficient

- Reliable and efficient delivery infrastructure (product picking, distribution,

customer satisfaction handling)

Difficult forcompetitors to

imitate

A core competence should be "competitively unique": In many industries,most skills can be considered a prerequisite for participation and do not

provide any significant competitor differentiation. To qualify as "core", a

competence should be something that other competitors wish they had

within their own business.

Example:Why does Dell have such a strong position in the personal

computer market?

Core competencies that are difficult for the competition to imitate:

- Online customer "bespoking" of each computer built

- Minimisation of working capital in the production process

- High manufacturing and distribution quality - reliable products at

competitive prices

A competence which is central to the business's operations but which is not exceptional in some way

should not be considered as a core competence, as it will not differentiate the business from any

other similar businesses. For example, a process which uses common computer components and is

staffed by people with only basic training cannot be regarded as a core competence. Such a processis highly unlikely to generate a differentiated advantage over rival businesses. However it is possible

to develop such a process into a core competence with suitable investment in equipment and

training.

It follows from the concept of Core Competencies that resources that are standardised or easily

available will not enable a business to achieve a competitive advantage over rivals.


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Competitor Analysis


Introduction

Competitor Analysis is an important part of the strategic planning process. This revision note

outlines the main role of, and steps in, competitor analysis

Why bother to analyse competitors?

Some businesses think it is best to get on with their own plans and ignore the competition. Others

become obsessed with tracking the actions of competitors (often using underhand or illegal

methods). Many businesses are happy simply to track the competition, copying their moves and

reacting to changes.

Competitor analysis has several important roles in strategic planning:

To help management understand their competitive advantages/disadvantages relative to

competitors

To generate understanding of competitors past, present (and most importantly) future strategies

To provide an informed basis to develop strategies to achieve competitive advantage in the future

To help forecast the returns that may be made from future investments (e.g. how will competitors

respond to a new product or pricing strategy?

Questions to ask

What questions should be asked when undertaking competitor analysis? The following is a useful list

to bear in mind:

Who are our competitors? (see the section on identifying competitors further below)

What threats do they pose?

What is the profile of our competitors?

What are the objectives of our competitors?

What strategies are our competitors pursuing and how successful are these strategies?

What are the strengths and weaknesses of our competitors?

How are our competitors likely to respond to any changes to the way we do business?

Sources of information for competitor analysis

Davidson (1997) described how the sources of competitor information can be neatly grouped into

three categories:


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Recorded data: this is easily available in published form either internally or externally. Good

examples include competitor annual reports and product brochures;

Observable data: this has to be actively sought and often assembled from several sources. A good

example is competitor pricing;

Opportunistic data: to get hold of this kind of data requires a lot of planning and organisation.

Much of it is anecdotal, coming from discussions with suppliers, customers and, perhaps, previous

management of competitors.

The table below lists possible sources of competitor data using Davidsons categorisation:

Recorded Data Observable Data Opportunistic Data

Annual report & accounts Pricing / price lists Meetings with suppliers

Press releases Advertising campaigns Trade shows

Newspaper articles Promotions Sales force meetings

Analysts reports Tenders Seminars / conferences

Regulatory reports Patent applications Recruiting ex-employees

Government reports Discussion with shared distributors

Presentations / speeches Social contacts with competitors


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McKinsey Growth Pyramid - Growth Strategy


Introduction

This model is similar in some respects to the well-establishedAnsoff Model. However, it looks at

growth strategy from a slightly different perspective.

The McKinsey model argues that businesses should develop their growth strategies based on:

Operational skills

Privileged assets

Growth skills

Special relationships

Growth can be achieved by looking at business opportunities along several dimensions, summarisedin the diagram below:

Operational skills are the core competences that a business has which can provide the

foundation for a growth strategy. For example, the business may have strong competencies in

customer service; distribution, technology.

Privileged assets are those assets held by the business that are hard to replicate by competitors.

For example, in a direct marketing-based business these assets might include a particularly large

customer database, or a well-established brand.
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Growth skills are the skills that businesses need if they are to successfully manage a growth

strategy. These include the skills of new product development, or negotiating and integrating

acquisitions.

Special relationships are those that can open up new options. For example, the business may have

specially string relationships with trade bodies in the industry that can make the process of growingin export markets easier than for the competition.

The model outlines seven ways of achieving growth, which are summarised below:

Existing products to existing customers

The lowest-risk option; try to increase sales to the existing customer base; this is about increasing

the frequency of purchase and maintaining customer loyalty

Existing products to new customers

Taking the existing customer base, the objective is to find entirely new products that these

customers might buy, or start to provide products that existing customers currently buy from

competitors

New products and services

A combination of Ansoffs market development & diversification strategy taking a risk by

developing and marketing new products. Some of these can be sold to existing customers who

may trust the business (and its brands) to deliver; entirely new customers may need more

persuasion

New delivery approaches

This option focuses on the use of distribution channels as a possible source of growth. Are there

ways in which existing products and services can be sold via new or emerging channels which might

boost sales?

New geographies

With this method, businesses are encouraged to consider new geographic areas into which to sell

their products. Geographical expansion is one of the most powerful options for growth but also

one of the most difficult.

New industry structure

This option considers the possibility of acquiring troubled competitors or consolidating the industry

through a general acquisition programme

New competitive arenas

This option requires a business to think about opportunities to integrate vertically or consider

whether the skills of the business could be used in other industries.


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Strategic Audit


In ourintroduction to business strategy, we emphasised the role of the "business environment" in

shaping strategic thinking and decision-making.

The external environment in which a business operates can create opportunities which a business

can exploit, as well as threats which could damage a business. However, to be in a position to exploit

opportunities or respond to threats, a business needs to have the right resources and capabilities in

place.

An important part of business strategy is concerned with ensuring that these resources and

competencies are understood and evaluated - a process that is often known as a "Strategic Audit".

The process of conducting a strategic audit can be summarised into the following stages:

(1) Resource Audit:

The resource audit identifies the resources available to a business. Some of these can be owned (e.g.

plant and machinery, trademarks, retail outlets) whereas other resources can be obtained through

partnerships, joint ventures or simply supplier arrangements with other businesses.You can read

more about resources here.

(2) Value Chain Analysis:

Value Chain Analysis describes the activities that take place in a business and relates them to an

analysis of the competitive strength of the business. Influential work by Michael Porter suggestedthat the activities of a business could be grouped under two headings:

(1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g.

component assembly);

(2) Support Activities, which whilst they are not directly involved in production, may increase

effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake

all primary and support activities.

Value Chain Analysis is one way of identifying which activities are best undertaken by a business and

which are best provided by others ("outsourced").You can read more about Value Chain Analysis

here.

(3) Core Competence Analysis:

Core competencies are those capabilities that are critical to a business achieving competitive

advantage. The starting point for analysing core competencies is recognising that competition

between businesses is as much a race for competence mastery as it is for market position and

market power.
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Senior management cannot focus on all activities of a business and the competencies required to

undertake them. So the goal is for management to focus attention on competencies that really

affect competitive advantage.You can read more about the concept of Core Competencies here.

(4) Performance Analysis

The resource audit, value chain analysis and core competence analysis help to define the strategic

capabilities of a business. After completing such analysis, questions that can be asked that evaluate

the overall performance of the business. These questions include:

- How have the resources deployed in the business changed over time; this is "historical analysis"

- How do the resources and capabilities of the business compare with others in the industry -

"industry norm analysis"

- How do the resources and capabilities of the business compare with "best-in-class" - wherever that

is to be found-"benchmarking"

- How has the financial performance of the business changed over time and how does it compare

with key competitors and the industry as a whole? -"ratio analysis"

(5) Portfolio Analysis:

Portfolio Analysis analyses the overall balance of the strategic business units of a business. Most

large businesses have operations in more than one market segment, and often in different

geographical markets. Larger, diversified groups often have several divisions (each containing many

business units) operating in quite distinct industries.

An important objective of a strategic audit is to ensure that the business portfolio is strong and that

business units requiring investment and management attention are highlighted. This is important - a

business should always consider which markets are most attractive and which business units have

the potential to achieve advantage in the most attractive markets.

Traditionally, two analytical models have been widely used to undertake portfolio analysis:

- The Boston Consulting Group Portfolio Matrix (the "Boston Box");

- The McKinsey/General Electric Growth Share Matrix

(6) SWOT Analysis:

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is an

important tool for auditing the overall strategic position of a business and its environment. Read

more about it here.
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Premising and Forecasting

Planning premises are the anticipated environments in which plans are expected to operate Environmental Forecasting

Values and areas of forecasting Forecasting with the Delphi technique

What are the typical steps of the technique?Types of Planning Premises

Different types of planning premises are depicted in the picture (figure) below.

Types of Planning Premises are briefly explained as follows:-

1. Internal and External Premises

1. Internal Premises come from thebusinessitself. It includes skills of the workers,capitalinvestmentpolicies, philosophy ofmanagement, salesforecasts, etc.

2. External Premises come from the external environment. That is, economic, social, political,cultural and technological environment. External premises cannot be controlled by the

business.

2. Controllable, Semi-controllable and Uncontrollable Premises
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1. Controllable Premises are those which are fully controlled by the management. They includefactors like materials, machines andmoney.

2. Semi-controllable Premises are partly controllable. They includemarketingstrategy.3. Uncontrollable Premises are those over which the management has absolutely no control.

They include weather conditions, consumers' behaviour, government policy, natural

calamities, wars, etc.

3. Tangible and Intangible Premises

1. Tangible Premises can be measured in quantitative terms. They include units of productionand sale, money, time, hours of work, etc.

2. Intangible Premises cannot be measured in quantitative terms. They include goodwill of thebusiness, employee's morale, employee's attitude and public relations.

4. Constant and Variable Premises

1. Constant Premises do not change. They remain the same, even if there is a change in thecourse of action. They include men, money and machines.

2. Variable Premises are subject to change. They change according to the course of action.They include union-management relations
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Management by Exception

Management by exception is the practice of examining the financial and operational results of a

business, and only bringing issues to the attention of management if results represent substantial

differences from the budgeted or expected amount. For example, the companycontrollermay be

required to notify management of thoseexpensesthat are the greater of $10,000 or 20% higher

than expected.

The purpose of the management by exception concept is to only bother management with the most

important variances from the planned direction or results of the business. Managers will presumably

spend more time attending to and correcting these larger variances.

The concept can be fine-tuned, so that smaller variances are brought to the attention of lower-level

managers, while a massive variance is reported straight to senior management.

Advantages of Management by Exception

There are several valid reasons for using this technique. They are:

It reduces the amount of financial and operational results that management must review,which is a more efficient use of their time.

The report writer linked to the accounting system can be set to automatically print reportsat stated intervals that contain the predetermined exception levels, which is a minimally-

invasive reporting approach.

This method allows employees to follow their own approaches to achieving the resultsmandated in the company'sbudget. Management will only step in if exception conditions

exist.

Disadvantages of Management by Exception

There are several issues with the management by exception concept, which are:

This concept is based on the existence of a budget against which actual results arecompared. If the budget was not well formulated, there may be a large number of variances,

many of which are irrelevant, and which will waste the time of anyone investigating them.

The concept requires the use of financial analysts who prepare variance summaries andpresent this information to management. Thus, an extra layer of corporate overhead is

required to make the concept function properly.

This concept is based on the command-and-control system, where conditions are monitoredand decisions made by a central group of senior managers. You could instead have a

decentralized organizational structure, where local managers could monitor conditions on a

daily basis, and so would not need an exception reporting system.
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The concept assumes that only managers can correct variances. If a business were insteadstructured so that front line employees could deal with most variances as soon as they arise,

there would be little need for management by exception.

Business Models (Out Sourcing, PPP etc)

A business model describes what a firm will do, and how, to build and capture wealth forstakeholders

Effective business models operationalize good strategies -- turning position and fit intowealth

FOUR ASPECTS OF BUSINESS MODELS

Revenue Sources Cost Drivers Investment Size Critical Success Factors

REVENUE SOURCES

Subscription/Membership Fixed amount at regular intervals prior to receiving product/service

Volume/Unit-based Fixed price in exchange for product/service

Advertising-based Exempt from fee or pays fraction of the value

Licensing & Syndication One time fee

Transaction fee Fixed fee or percentage of total value of transaction

COST DRIVERS

Fixed: item costs do not vary with volume Semi-variable: variable & fixed costs


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Variable: item costs vary with volume Non-recurring: item of cost occurs infrequently

INVESTMENT SIZE

Maximizing finance needs Positive cash flow

Cash Breakeven

CRITICAL SUCCESS FACTORS

An operational function or competency that a company must possess in order to besustainable & profitable

Perform sensitive analysisEFFECTIVE BUSINESS MODELS BUILD & CAPTURE WEALTH

Build wealth: By efficiently(profitably) transforming inputs into something that customers value

enough to pay for again and again and again

By supporting growth

Capture wealth:

By siphoning off some of the accumulated wealth for stakeholders And by developing recognizable value strategic positions, know-how, customers,

free cash flow, lifestyles, social impact that can be captured

About who matters Owners, investors, family, workers, community About what kind of wealth matters Financial capital, social capital, intellectual capital...ie., cash, good life, rich family

life, entrepreneurial impact, social impact

About the strategy that will deliver the wealth that matters to the stakeholders thatmatter

About the structure that supports strategy

BUSINESS MODELS START WITH WHAT THE WORLD GIVES

1.Describe the landscape:


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Porter Environment, industry, and relevant trends.

2. Paint in competitors:

Competitor table. Perceptual maps. What do you need to play? How do competitors compete? What opportunities exist?

3. Identify strengths & weaknesses

Vision, skills, core technologies4. Identify stakeholders you must serve

Owners, family, workers, community5. Identify the wealth you will capture

Capital, good life, family life, fame entrepreneurial effectiveness, social value6. Choose a position or approach

And elaborate a strategy to realize this Especially a revenue model

7. Sketch a structure to

operationalize the strategy

Value chain, activity system, culture, simple rules8. Work out the implications

Functional strategies Timeline and milestones Financial projections & capital needs Path to profitability, sale, or other realization

of value


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Porters Generic Strategies

Overall Cost Leadership Strategy Differentiation Strategy Focused Strategy (low cost or differentiation)

Porter's Generic Strategies

Choosing Your Route to Competitive Advantage

Just one strategic option for airlines.

iStockphoto/alandj

Which do you prefer when you fly: a cheap, no-frills airline, or a more expensive operator with

fantastic service levels and maximum comfort? And would you ever consider going with a small

company which focuses on just a few routes?


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The choice is up to you, of course. But the point we're making here is that when you come to book a

flight, there are some very different options available.

Why is this so? The answer is that each of these airlines has chosen a different way of achieving

competitive advantage in a crowded marketplace.

The no-frills operators have opted to cut costs to a minimum and pass their savings on to customers

in lower prices. This helps them grab market share and ensure their planes are as full as possible,

further driving down cost. The luxury airlines, on the other hand, focus their efforts on making their

service as wonderful as possible, and the higher prices they can command as a result make up for

their higher costs.

Meanwhile, smaller airlines try to make the most of their detailed knowledge of just a few routes to

provide better or cheaper services than their larger, international rivals.

These three approaches are examples of "generic strategies", because they can be applied to

products or services in all industries, and to organizations of all sizes. They were first set out by

Michael Porter in 1985 in his book Competitive Advantage: Creating and Sustaining Superior

Performance. Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation"

(creating uniquely desirable products and services) and "Focus" (offering a specialized service in a

niche market). He then subdivided the Focus strategy into two parts: "Cost Focus" and

"Differentiation Focus". These are shown in Figure 1 below.

The terms "Cost Focus" and "Differentiation Focus" can be a little confusing, as they could be

interpreted as meaning "A focus on cost" or "A focus on differentiation". Remember that Cost Focus

means emphasizing cost-minimization within a focused market, and Differentiation Focus means

pursuing strategic differentiation within a focused market.

The Cost Leadership Strategy


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Porter's generic strategies are ways of gaining competitive advantage in other words, developing

the "edge" that gets you the sale and takes it away from your competitors. There are two main ways

of achieving this within a Cost Leadership strategy:

Increasing profits by reducing costs, while charging industry-average prices. Increasing market share through charging lower prices, while still making a reasonable profit

on each sale because you've reduced costs.

Remember that Cost Leadership is about minimizing the cost to the organization of delivering

products and services. The cost or price paid by the customer is a separate issue!

The Cost Leadership strategy is exactly that it involves being the leader in terms of cost in yourindustry or market. Simply being amongst the lowest-cost producers is not good enough, as you

leave yourself wide open to attack by other low cost producers who may undercut your prices and

therefore block your attempts to increase market share.

You therefore need to be confident that you can achieve and maintain the number one position

before choosing the Cost Leadership route. Companies that are successful in achieving Cost

Leadership usually have:

Access to the capital needed to invest in technology that will bring costs down. Very efficient logistics. A low cost base (labor, materials, facilities), and a way of sustainably cutting costs below

those of other competitors.

The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are

not unique to you, and that other competitors copy your cost reduction strategies. This is why it's

important to continuously find ways of reducing every cost. One successful way of doing this is by

adopting the JapaneseKaizenphilosophy of "continuous improvement".

The Differentiation Strategy

Differentiation involves making your products or services different from and more attractive those of

your competitors. How you do this depends on the exact nature of your industry and of the products

and services themselves, but will typically involve features, functionality, durability, support and also

brand image that your customers value.

To make a success of a Differentiation strategy, organizations need:

Good research, development and innovation. The ability to deliver high-quality products or services.
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Effective sales and marketing, so that the market understands the benefits offered by thedifferentiated offerings.

Large organizations pursuing a differentiation strategy need to stay agile with their new product

development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus

Differentiation strategies in different market segments.

The Focus Strategy

Companies that use Focus strategies concentrate on particular niche markets and, by understanding

the dynamics of that market and the unique needs of customers within it, develop uniquely low cost

or well-specified products for the market. Because they serve customers in their market uniquely

well, they tend to build strong brand loyalty amongst their customers. This makes their particular

market segment less attractive to competitors.

As with broad market strategies, it is still essential to decide whether you will pursue Cost

Leadership or Differentiation once you have selected a Focus strategy as your main approach: Focus

is not normally enough on its own.

But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic

Focus strategy is to ensure that you are adding something extra as a result of serving only that

market niche. It's simply not enough to focus on only one market segment because your

organization is too small to serve a broader market (if you do, you risk competing against better-

resourced broad market companies' offerings.)

The "something extra" that you add can contribute to reducing costs (perhaps through your

knowledge of specialist suppliers) or to increasing differentiation (though your deep understandingof customers' needs).

Generic strategies apply to not-for-profit organizations too. A not-for-profit can use a Cost

Leadership strategy to minimize the cost of getting donations and achieving more for their income,

while one with pursing a Differentiation strategy will be committed to the very best outcomes, even

if the volume of work they do as a result is lower. Local charities are great examples of organizations

using Focus strategies to get donations and contribute to their communities.

Choosing the Right Generic Strategy

Your choice of which generic strategy to pursue underpins every other strategic decision you make,

so it's worth spending time to get it right.

But you do need to make a decision: Porter specifically warns against trying to "hedge your bets" by

following more than one strategy. One of the most important reasons why this is wise advice is that

the things you need to do to make each type of strategy work appeal to different types of people.

Cost Leadership requires a very detailed internal focus on processes. Differentiation, on the otherhand, demands an outward-facing, highly creative approach.


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So, when you come to choose which of the three generic strategies is for you, it's vital that you take

your organization's competencies and strengths into account.

Use the following steps to help you choose.

Step 1: For each generic strategy, carry out aSWOT Analysisof your strengths and weaknesses, andthe opportunities and threats you would face, if you adopted that strategy.

Having done this, it may be clear that your organization is unlikely to be able to make a success of

some of the generic strategies.

Step 2: UseFive Forces Analysisto understand the nature of the industry you are in.

Step 3: Compare the SWOT Analyses of the viable strategic options with the results of your Five

Forces analysis. For each strategic option, ask yourself how you could use that strategy to:

Reduce or manage supplier power.

Reduce or manage buyer/customer power. Come out on top of the competitive rivalry. Reduce or eliminate the threat of substitution. Reduce or eliminate the threat of new entry.

Select the generic strategy that gives you the strongest set of options.
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