Business Strategy

INTRODUCTION TO 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 INTRODUCTION TO BUSINESS STRATEGY....................................................................1 [Discover New Opportunities......................................................................................1 Manage and Eliminate Threats.].................................................................................1 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. ................................................................................................1 Table of Contents......................................................................................... ...............2 MAIN REFERENCES.....................................................................................................3 FEW WORDS ON MODEL.............................................................................................4 INTRODUCTION TO STRATEGY....................................................................................6 Five Ps for strategy................................................................................. ....................8 INTRODUCTION TO BUSINESS STARTEGY..................................................................11 INTRODUCTION TO ENVIRONMENT ANALYSIS...........................................................13 PESTLIED.................................................................................... ..............................14 GEO BUSINESS MODEL.............................................................................................17 PORTER’S DIAMOND.................................................................................................20 STRATEGIC MODELS USED IN INDUSTRY ANALYSIS...................................................24 Barriers & Profitability............................................................................................ ...24 Porter's Five Forces...................................................................................... .............26 SWOT ANALYSIS.......................................................................................... ..............30 STRATEGIC TRIANGLE...............................................................................................33 PRODUCT PORTFOLIO STRATEGY..............................................................................36 The Boston Matrix................................................................................................. ....37 (Also called the BCG Matrix, the Growth-Share Matrix and Portfolio Analysis)......37 Focusing effort to give the greatest returns..........................................................37

RELATED DIVERSIFICATION GRID..............................................................................40 GENERIC STRATEGIES...............................................................................................42 FOUR ROUTES TO STRATEGIC ADVANTAGE...............................................................46

MAIN REFERENCES • • • • • • •

THE MIND OF THE STRATEGIST (1982) K.OHMAE COMPETITIVE STRATEGY: TECHNIQUE FOR ANALYZING THE INDUSTRIES & COMPETITIORS BY MICHAEL PORTER SIMON & SCHUSTER FROM DIVERSIFICATION THROUGH ACQUISTION (1979) COMPETITVE ADVANTAGE: CREATING & SUSTAINING SUPERIOR PERFORMANCE BY PORTER (1985) THE COMPETITIVE ADVANTAGE OF NATIONS BY MICHEAL PORTER (1990) INTERNATIONAL BUSINESS & MULTINATIONAL ENTERPRISE, ROBOCK & SIMMONDS, RICHARD D.IRWIN INC. 1989. PROVEN BUSINESS MODEL BY GROWER.

FEW WORDS ON MODEL The term “model” is often used to describe a pictorial summary of principal Challenges within a particular domain. A model is a representation of reality. It seeks to encompass all the essential elements of a particular domain but, in so doing, it simplifies & generalizes. A model is a framework, identifying the broadest Challenges & considerations. 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.

Since models simplify reality they exclude specific consideration of particular Challenges, they cannot contain all the detailed elements required for a particular analysis. Therefore models should not me used as a complete analysis in them but to help stimulate broader thinking about an area of interest in an analytical process. The representation of models 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: • •

Principle: the basis or purpose of the model. Assumption: underpinning the ideas without which the model would not hold true.

• •

•

Elements: a description or definition of the identifiable parts of the model. Challenges: a summary of significant topics or points intended to give further explanation & ideas concerning the context & analysis of the model. Application: how the model may be used.

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 today’s organization

•

Models which are included in most high-level management courses.

INTRODUCTION TO STRATEGY Definition: Strategy is the means by which objectives are consciously pursued and obtained over time. The word “strategy” derives from the Greek word stratçgos; which derives from two words: * "stratos" – meaning army. * "ago" – which is the ancient Greek for leading/guiding/moving. 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”. Strategy at Different Levels of a Business 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 organization’s activities – strategies decisions are likely to be concerned with the scope of an organization’s 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 mean’s raising one’s 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.

Tests of good strategy Tests of good strategy in application include the following:

Value added: A good strategy will deliver increased value in the market place. This might show itself in increased profitability, but might also be visible in gains in longer-term measures of business performance such as market share, innovative ability & satisfaction for employees. • Consistency: A good strategy will be consistent with the circumstances that surround a business at any point in time. It will take into account its ability to use its resources efficiently, its environment, which may be changing fast or slowly, & its organizational ability to cope with the circumstances of that time. • Competitive advantage: For most organizations, a good strategy will increase the sustainable competitive advantage of the organization. After going through the above discussion, one of the standard models for defining strategy is Five’s P for Strategy. •

Five Ps for strategy Mintzberg (1991) makes it clear that strategic thinking involves more than just following an ‘industry recipe’, a copying a competitor’s strategy or carrying on the same as before, unless these have been deliberately decided upon. He suggested that there are fives ways in which the term ‘strategy’ used. Pattern

Position

Perspective

Ploy

Plan

Principle There is no single definition of strategy; it is possible to consider & define strategy in different ways. Assumption Strategy is implemented in many different ways, often depending on the specific requirements at that time. Elements Plan Some sort of consciously intended course of action, a guideline (or set of guidelines) to deal with a situation. Ploy The ploy is a specific man oeuvre intended to directly outwit a competitor. Pattern A pattern is a consistent, intentional or unintentional pattern of behavior within a stream of actions. Position The Position is a means of defining an organization in relation to its competitive environment. 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 The 5P approaches are not mutually exclusive. Flexibility Plans, Position & ploys may be easily changed whereas Perspectives & Patterns are longer term & more fundamental. Programme A sixth “P” programme- an iterative process that aids progress towards achievement of a vision- might be added. Applications As a definition & as an aid to strategy formulation The term ‘strategy’ is sometimes ill-used. Use of the five definitions helps to prevent confusion & aids strategy formulation. As a stimulus to lateral thinking 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. Appreciation of strategy Challenges 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. Basic idea is used behind the formulation of ENVIRONMENT STRATEGY is to exploit opportunities in the environment by drawing its competitive strengths. The models discussed in this topic are: • Geo business model •

PESTILED

•

Porter’s 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 firm’s 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.

BUSINESS UNIT COMPETITIVE ENVIRONMENT

THE INDUSTRY ENVIRONMENT FIRM ENVIRONMENT

PESTLIED

ECONOMICAL TECHNICAL POLITICAL LEGAL

SOCIAL ORGANISA

DEMOGRAPHIC INTERNATIONAL ENVIRONMENTAL

Principle PESTLIED is a mnemonic which represents various environmental factors that can be addressed when analyzing an organization. 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. • • • • • •

Government type and stability Freedom of press, rule of law and levels of bureaucracy and corruption Regulation and de-regulation trends Social and employment legislation Tax policy, and trade and tariff controls Environmental and consumer-protection legislation

•

Likely changes in the political environment

Economic: • • • • • • • •

Stage of business cycle Current and project economic growth, inflation and interest rates Unemployment and labor supply Labor costs Levels of disposable income and income distribution Impact of globalization Likely impact of technological or other change on the economy Likely changes in the economic environment

Social: Population growth rate and age profile • Population health, education and social mobility, and attitudes to these • Population employment patterns, job market freedom and attitudes to work • Press attitudes, public opinion, social attitudes and social taboos • Lifestyle choices and attitudes to these • Socio-Cultural changes These factors comprise social trends & tolerance towards the organization & its product. •

Technological: Impact of emerging technologies • Impact of Internet, reduction in communications costs and increased remote working • Research and Development activity • Impact of technology transfer These factors include emergence of new technologies, access to technical know-how, foreign as well as indigenous. •

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 Negative & positive factors Several PESTLIED factors may interact negatively or positively. Relative importance of factors 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 Analysis & audit PESTLIED may be used in the analysis & audit of organization. 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

CONDTIONING MOTIVATIONAL VARIABLES VARIABLES

CONTROL VARIABLES

SOURCE: INTERNATIONAL BUSINESS & MULTINATIONAL ENTERPRISE, ROBOCK & SIMMONDS, RICHARD D.IRWIN INC. 1989. Principle There is a comprehensive framework for explaining & predicting international business. Assumptions

There are three main interacting forces that affect firm’s 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. Country-specific characteristics: helping to sustain competitive advantages of firms. For example, economics size of home market, nature of domestic competition, resource scarcity or surplus. Inter-nation variables: for example, tariffs, strategic alliances, international finance. Motivational variables This category of variable is concerned with competitive strategy. Market-seeking measures: horizontal/forward integration. Resource-seeking measures: vertical/backward integration. Production efficiency-seeking measures: for example, lower resource cost. Technology-seeking measures: securing access to foreign technology or skilled labour. Risk avoidance measures: for example, minimizing possibilities of production interruption, improving market control. Exchange-of-threat measures: waging a counter-offensive strategy to disarm a competitor, especially in their home market. 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 organization’s specific activities. Influence of variables The organization perceives the conditioning variables (opportunities for competitive advantage), responds appropriately (motivational variablescompetitive strategy) but has no influence over control variables. Applications Growth strategies The model may be used in the assessment & development of international business growth strategies. Growth potential assessment 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.

PORTER’S 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

RELATED & SUPPORTING INDUSTRIES

SOURCE: THE COMPETITIVE ADVANTAGE OF NATIONS BY MICHEAL PORTER (1990) Principle The model shows how a nation’s 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 C. Natural resources (minerals, energy) D. Labor, and E. Local population size. 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, 3. the goals of individuals in companies, 4. The pressure on companies to innovate and invest. Elements Factor conditions Factor’s conditions are the state of the nation’s 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.

•

A more demanding local market leads to national advantage.

•

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 more demanding local market leads to national advantage.

•

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.

Strategy, structure, rivalry Firm’s 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. Relationships between attributes Increase in one attribute can stimulate other attributes. Prosperity

Organizations prosper particularly with access to specialized assets & skills, best information, effective management, Investment & innovation. Reasons for failure 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 organization’s control (such as technological innovations), & government actions (such as investment & taxation). Industry clusters Nations succeed not in individual industries but in clusters of industries whose performance reflects the state of the national economy.

Applications 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 Strategy may be reviewed to improve utilization of factors of production & so contribute towards improving competitive advantage of the organization or business unit. 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

Barriers & Profitability EXIT BARRIERS LOW =LOW PROFITS =LOW RETURNS = STABLE RISKY ENTRY BARRIERS LOW

HIGH

PROFITS = HIGH HIGH

HIGH PROFITS RETURNS

PROFITS =

SOURCE: COMPETITIVE STRATEGY: TECHNIQUE FOR ANALYZING THE INDUSTRIES & COMPETITIORS BY MICHAEL PORTER 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 • • • • •

Specialized assets such as low liquidation values Fixed costs of exit Strategic interrelationships & alliances Emotional barriers Government & social restrictions

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 ENTRA NT

INDUSTRY COMPETITIOR S SUPPLIER POWER

RIVALRY AMONG

BUYER POWER

THREAT OF SUBSITU TION SOURCE: COMPETITVE ADVANTAGE: CREATING & SUSTAINING SUPERIOR PERFORMANCE BY PORTER (1985) 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 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 Buyers are the customers of firm products. Substitutes These are competitor’s products (services) which may be alternatives to those supplied by the firm. Suppliers 1

Industrial organization is a field of economics that studies the strategic behavior of firms, the structure of markets and their interactions.

Suppliers provide raw materials & other resources. Industry competitors These are firms which compete in the same market & act as rivals to the organization. Challenges Effect of the forces 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 •

Potential entrants may be deterred by:

•

Economies of scale achieved by existing firms

•

Entrenched customer loyalty

•

Capital costs of entry

•

Poor access to distribution channels

•

Cost disadvantages such as licenses & adverse government policy.

Buyers Buyers may try to force down prices whilst requiring better quality or service & may play off competitors against one another. The influence of buyer’s groups is greater if: •

They are large customers

•

Many substitute products exists

•

Profit margin is low

•

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 Supplier groups are powerful if: •

They are well integrated

•

They supply small customers

•

Their group’s products are differentiated

•

They integrate forward

Competition Competitive rivalry may increase where one or more of the competitors are under threat. Applications Strategy development This model could be used to develop a strategy to counter competitive forces. 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. Enhancing competitive advantage The model could be applied in anticipating & exploiting changes in the forces ahead of competitors.

SWOT ANALYSIS

Principle SWOT is a frame work that can be used to evaluate a company. Assumption The internal positive & negative attributes of an organization in relation to its external environment are central to its success. Elements Strengths These comprise any positive internal attributes of an organization. Weakness These comprise any negative internal attribute of the organization. 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 organization’s growth. Challenges Context SWOT analysis requires an understanding both of the organization’s 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 an existing organization or part of an organization

•

Of processes

•

Of organizational problems as they arise.

Strategy formulation SWOT analysis can be used in the development of organizational strategy. Self-assessment The model may also be used for individual’s self-assessment.

STRATEGIC TRIANGLE MULTIPLE MARKET SEGMENTS TARGET SEGMENTS

CUSTOMER S

VA UE L

V LU A E

COST CORPORATIO N

COMPETITIOR S

PRODUCT/SERVICE DIFFERENTIATION SOURCE: THE MIND OF THE STRATEGIST K. OHMAE 1982.

Principle There are three main interest groups in the development of any business strategy. The 3C’s 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 Only by integrating these three C’s (Corporation, Customer, Competitors) in a strategic triangle, a sustained competitive advantage can exist. Ohmae refers to these key factors as the three C’s or strategic triangle. Elements 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 corporation’s strengths relative to the competition in the functional areas that are critical to achieve success in the industry. This can be achieved by: •

Selectivity and sequencing

•

Make or buy

•

Cost-effectiveness

Competitors Competitor based strategies can be constructed by looking at possible sources of differentiation in functions 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

Superior performance can be achieved by an organization differentiating itself from its competitors using its relative corporate strengths to better satisfy customers needs. Choice of strategists Strategists are best placed where they are able to deal with all of the organization’s 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 Developing customer based strategies The market is segmented & changes to product applications, customer mix & other product attributes may be engineered using this model to satisfy customer trends. Developing corporate based strategies The model may be used to identify, select & sequence key functions in order to optimize. Developing competitor based strategies 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. Assessment of strengths & weakness The model may be applied to assess the organization’s activities.

PRODUCT PORTFOLIO STRATEGY Introduction 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. The company must: (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. Methods of Portfolio Planning 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. The models included are: •

Boston Consulting Group Matrix

•

Related Diversification Grid

•

Generic strategies

•

Four routes to strategic advantage

The Boston Matrix (Also called the BCG Matrix, the Growth-Share Matrix and Portfolio Analysis) Focusing effort to give the greatest returns 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, it’s become much easier to borrow money cheaply (in many parts of the world) making this less of an issue.

MARKET SHARE LOW

HIGH

HIGH MARKET

QUESTION MARKS

STARS

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 lowgrowth 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 Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market share available is expanding, and there's plenty of opportunity for everyone to make money. Dogs: Low Market Share / Low 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. Cash Cows: High Market Share / Low Market Growth 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. Stars: High Market Share / High Market Growth

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 The importance of competitive forces must be assessed when seeking to reposition products using this model. Applications Strategy evaluation •

Resource allocation

•

Resources should be allocated appropriately to the type of products.

•

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

INDUSTRY ATTRACTIVENESS

BUSINESS POSITION

KEY

HIGH

MEDIUM

LOW

NO DIVERSIFICATI ON

R-CD

R-CD

MEDIUM

R-SD

NO DIVERSIFICATI ON

R-CD

LOW

R-SD

R-SD

NO DIVERSIFICATI ON

HIGH

R-CD = RELATIVE-COMPLEMENTARY DIVERSIFICATION

R-SD = RELATIVE-SUPPLEMENTARY DIVERSIFICATION SOURCE: SIMON & SCHUSTER FROM DIVERSIFICATION THROUGH ACQUISTION (1979) Principle An organization considering ‘related’ diversification through acquisition should appraise the target company’s strengths within its particular industry sector. Assumption The degree of compatibility of critical success factors between an organization & a target acquisition will significantly affect the success of the acquisition. Elements Related- supplementary diversification(R-SD) 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 & synergy 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.

DIFFERENTAITION LEADERSHIP

COST

GENERIC STRATEGIES

FOCUS

SOURCE: COMPETITIVE STRATEGY: TECHNIQUE FOR ANALYZING THE INDUSTRIES & COMPETITIORS BY MICHAEL PORTER Principle An organization should identify a strategic direction which is fundamental to establishing & maintaining a strong competitive position. If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. 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 firm’s 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 The organization targets products or services in a particular market sector or market segment. 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 Cost leadership may be gained as organizations become more experienced than competitors in technical process & marketing activities. Cost leadership risks These include obsolescence & new entrants to the market copying in the leading organization’s 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. Focus niche strategy 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 Differentiation involves the development of unique product characteristics improved branding & increased customer loyalty. 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 KFS

NEW/CREATIVE AGGRESSIVE INTIATIVES

COMPETITVE WISELY INTENSIFY FUNCTIONAL DIFFERENTIATION ASK ‘WHY-WHY’ RELATIVE SUPERIORITY

STRATEGIC DEGREES OF FREEDOM

EXPLOIT COMPETITIORS

MAXIMIZE USER BENEFIT

AVOID HEAD-ON COMPETITION

SOURCE: THE MIND OF THE STRATEGIST (1982) K.OHMAE 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 Route1: key factors for success (KFS) Resources are allocated where they will be most effective in relation to the identified key success factors. Route 2: relative superiority Competitors’ weaknesses are exploited using new technology or other strengths, such as an effective sales force. Route 3: aggressive initiatives These include direct competition with the new business or new products. Route 4: strategic degrees of freedom These embrace innovations in products or markets where no competition exists. Challenges Route 1: KFS An effective short-cut to success is to concentrate principal resources early within a single strategically significant organizational function. Route 2: relative superiority A company may exploit any difference in competitive conditions by analyzing competitor’s products in detail to determine where it might gain price or cost advantage. Route 3: aggressive initiatives This is unconventional strategy that analyses in detail the established assumptions of an industry or an organization in order to change the direction of strategic thinking. Route 4: strategic degrees of freedom 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 •

Assessment of KFS & organizational functions assists strategy formulation.

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Product portfolio planning

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The model aids product portfolio planning where customer’s expectations are paramount.

Analysis of strengths & weakness 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.

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