Business Strategy.docx

SUBJECT

NAME STUDENT ID

DATE

HOLMES COLLEGE

Table of Contents Introduction: .................................................................................................................................... 3 Ghemawat’s AAA Model: .............................................................................................................. 3 Porter’s Five Competitive Forces: .................................................................................................. 4 1-

Threat of new entrants ............................................................................................................ 4 Example .................................................................................................................................. 4

2-

Bargaining power of suppliers ................................................................................................ 5 Example .................................................................................................................................. 5

3-

Bargaining power of buyers .................................................................................................... 5 Powers of Buyers .................................................................................................................... 6 1-

Less number of customer for any product/service .......................................................... 6

2-

Product/service substitutes .............................................................................................. 6

Example .................................................................................................................................. 6 4-

Threat of substitute products ................................................................................................... 6 Example .................................................................................................................................. 6

5-

Rivalry among existing competitors ....................................................................................... 6 Example .................................................................................................................................. 7

PESTLE ANALYSIS: .................................................................................................................... 7 ADVANTAGES of PESTLE ANALYSIS: .................................................................................... 8 DISADVANTAGES of PESTLE ANALYSIS .............................................................................. 8 SWOT Analysis: ............................................................................................................................. 8 Conclusion: ................................................................................................................................... 10 References: .................................................................................................................................... 11

Introduction: Business strategy is dependent on the scope of business’ activities and without a proper business strategy the desired objectives can’t be achieved. Business strategies are of two type; generic strategies are concerned with the growth (expansion), internationalisation (globalisation) and retrenchment whereas competitive strategies are competitor specific and aims at outsmarting rivals either through lower prices (economies of scale) or product/service differentiation. Business strategic tools help the organisation to analyse the market dynamics for their product and services in order to have business growth, competitive position and strong financial performance. With the help of business strategy tools, the organisations can change its strategic plans and approaches to adjust to changing market dynamics. Business strategy tools help the firm to evaluate its strengths, vulnerabilities, resources, opportunities and capabilities. Moreover, with the help of strategy tools, any firm can have a reflection of competitors and market. Business strategy tools ultimately shape the short and long term business strategy of a business to achieve its vision, prioritize objectives and optimize financial growth.

Ghemawat’s AAA Model: Pankaj Ghemawat is of the opinion that the scale of globalization is limited and for the world to become fully integrated and globalized the business interactions and activities has to be expanded. Ghemawat presented CAGE framework to analyze the barriers that exist internationally and regionally. His AAA global strategy framework aims at identifying various strategies through which businesses can expand their operations internationally. AAA model is an acronym for Adaptation, Aggregation and Arbitrage. Adaption strategies deals with increasing expansion in international market by changing the initial global strategy to suit the environment of the entry market. For instance, McDonalds launched McAloo and other vegetarian producrs to persuade customers in India. Similarly, Aggregation aims at bridging the differences through investment and communication. For instance, Whirpool corporation expanded business internationally by offering multi-products for large base of consumer instead of being specific. Lastly, arbitrage strategies rely on shifting operations internationally to offer competitive products with high quality

to the consumers. It’s a dual approach whereby organisation produce at less cost and sells at high cost. For instance, Apple has shifted its business production and operations to China to lower the cost.

Porter’s Five Competitive Forces: Porter’s five Forces are helpful in determining industry structure and level of competition. The lower the competitive forces, the high profitability and vice-versa. The industry is less attractive and profitable if the products/services have more substitutes and fewer buyers and fewer suppliers. If the forces are stronger than the profit making would be challenging. By using Porter’s Five Forces, new markets can be identified with lesser competition and maximum opportunities and profits. The level of competition in any market should be known before starting a new business or entering an industry. The five forces identified by Porter defines the competiveness of the market and specific industry. For instance, the airline industry is competitive and returns on investments aren’t attractive due to the intense five forces. Whereas, the five forces are mild in soft-drink industry and businesses can have high returns.

1- Threat of new entrants New entrants bring new capacity and capabilities to access the market and gain market share. The loss of market share to new entrants means a cut on the profit shares of existing players. However, entry to a new market or industry isn’t easy as there are many barriers. If the barriers are more and higher then the threat of entry of new entrants is minimum. Noteworthy Barriers 1- Economies of scale 2- Customer loyalty 3- Large capital investment 4- Government policies 5- Lack of research and development

Example

For instance, the chances of new entrants in airline industry are low to medium due to huge upfront investment to buy aircrafts, manage operations, acquire licenses, distribution channels and access flight routes. Therefore, the new entrant would have a competitive disadvantage over existing players. However, factors like liberalisation of airline industry market, leasing options and financing from banks, investors and manufacturers can attract new entrants.

2- Bargaining power of suppliers The market of inputs is an essential to understand the power and control of suppliers. The profitability potential of any industry is dependent on the prices and quality of goods or services as provided by the suppliers. If the prices are raised or quality is reduced, then profitability would be lowered and vice-versa. The supplier power is dependent on availability of substitute suppliers. If the number of suppliers are limited the bargaining power of suppliers would be more. Factors Encouraging Power of Suppliers 1- Limited suppliers 2- Strength of distribution channels 3- Product or service differentiation

Example For instance, the bargaining power of suppliers in airline industry is very high which is dependent on aircraft manufacturers (Boeing and Airbus), fuel (global market, geopolitics), and spare parts. So, the suppliers have substantial bargaining power on the prices charged.

3- Bargaining power of buyers The market of outputs determines the customer loyalty to a brand or product. However, this sensitivity is largely affected by price changes. The bargaining power of the customers can be

minimized if the products/services offered is differentiated and firm implement loyalty programs. However, reduced trade barriers and internet has empowered customers. Powers of Buyers 1- Less number of customer for any product/service 2- Product/service substitutes

Example For instance, customers have more bargaining power in airline industry as they seek price comparisons before travelling. Moreover, almost all carriers offer same services and therefore, brand loyalty isn’t high. However, various flyer programs have been launched to attract and reward loyal and regular customers.

4- Threat of substitute products If the substitutes of products/services are more then the client can easily switch to other alternatives. Customers are more likely to switch brand if the prices increase and thus can affect the profitability of the industry. For instance, Gloria Jeans and Starbucks both offers coffee and customers would easily switch as they fulfil similar need. Example For instance, the threat of substitute is medium to high for airline industry as customers have various other travelling options which offer competitive prices as well. Trains, buses, cars and hyperloops are alternatives for the travelling customers.

5- Rivalry among existing competitors The number of existing competitors is dependent on market dynamics and industry’s growing capacity and capability. Moreover, factors like size and power determines the concentration ratio of an industry. The rivalry is likely to be fierce and intense if the size and power of competitors are alike and then they engage in price wars and advertising campaigns. Despite, low profit margins, if the barriers are high, companies are comfortable to remain in the industry.

Example For instance, the airline industry of America and Australia is competitive due to high barriers, tight regulations, easy entry of low cost carriers and similar size of competitors. The ultimate aim of Porter’s Five Forces is to understand and analyse the factors which results in high profits and low profits.

High Profits

Low Profits

More barriers

Low barriers

Weak supplier and buyer power

Strong buyer and supplier power

Limited substitutes

Many substitutes

Low competition

Intense competition

PESTLE ANALYSIS: PESTLE analysis is simple, perceptive tool to understand the external factors associated with the business environment. PESTLE analysis is helpful in identifying advantageous areas for any business and taking decisions accordingly. Political, economic, socio-cultural, technological, legal and environmental factors should be analysed before undertaking any business decision or applying any business strategy.

Political

Economic

Socio-

Technological

Legal

Environment

Cultural Tax

Demand/supply Cultural

policies

Automation

trends

Consumer

Climate and weather

laws

Fiscal

Foreign Direct Demographics Research

policies

Investment

and Health and Geographical

development

safety standards

location

Trade

Inflation

and Population

Technological

Labour laws Environmental

tariffs

interest rates

analytics

Domestic

Foreign

Religious

Price

Ethical consideration

policies

exchange rates

inclination

control

of environment

awareness

offsets

mechanism

PESTLE analysis is an analytical tool to understand external influences on any business and industry along with a tool for strategic business planning. Moreover, PESTLE analysis gives a complete overview of macro-environment factors which influence the business organisation but are not directly controllable.

ADVANTAGES of PESTLE ANALYSIS: 1- Simple and basic analytical tool 2- Gives an overview of macro external factors 3- Identify potential threats and opportunities 4- Promotes strategic planning culture in an organisation 5- Analysis of both domestic and international market 6- Cost-effective

DISADVANTAGES of PESTLE ANALYSIS 1- ‘Paralysis of analysis’ either due to oversimplification of information or gathering of too much information 2- Requires regular analysis and constant reviewing due to changing domestic and international environment 3- Subjective analysis

SWOT Analysis: SWOT analysis is one of the simplest business strategy tools that gives insights on the strengths, weaknesses, opportunities and threats of any business organisation. SWOT matrix is a business framework is helpful in accessing the factors that have direct impact on the performance of the

organisation. It is a two-dimensional matrix which aims at identifying favourable/helpful and unfavourable/harmful aspects.

Strengths Resources

Weaknesses and Poor reputation

capabilities Skilled workforce

Opportunities Favourable

Threats

trade Unemployment rates

policies Lack

of

satisfaction Products/services

Lack

of

differentiation

protection

customer Purchasing power of Disruptive customers patent Lifestyle changes

Innovation

technologies Corruption

New entrants

Strengths drive the growth and innovation. Business organisations must function in such a way that they avoid working against the strengths of the competitors. Whereas, weaknesses must be addressed to maximize the strengths of the business organisation. Moreover, opportunities can be internal as well external and helps the organisation to gain control and power in the market or industry. Whereas, threats are the risks associated with organisation which can be internal as well external. Risks and uncertainties hold back the organisation. Business organisations have to undertake extra costs, face challenges and delays if they neglect the threats.

Conclusion: Business strategy tools are essential to outline business strategy, decisions and plans. Without applying business strategy tools, organisation may overlook the threats and weaknesses in the industry or market which may be harmful for its growth, profitability and competitiveness. SWOT and PESTLE analysis gives an insight on internal and external factors respectively. The understanding of internal and external factors makes the decision making process simpler and easy. Both analytical tools are helpful in having comprehensive evaluation of the market and industry. Similarly, Proter’s five forces and Ghemawat’s AAA model are helpful in identifying the advantageous areas for the business organisation which can enhance the sustainability of the organisation.

References: 

Carton, R., & Hofer, C. (2006). Measuring Organizational Performance: Metrics for Entrepreneurship and Strategic Management Research. Great Britain: Edward Elgar Publishing.



Gunn, R., & Williams, W. (2007). Strategic tools: an empirical investigation into strategy in practice in the UK. Strategic Change Journal, 16, 201-216. DOI: 10.1002/jsc.799



Gomer, Justin and Jackson Hille. “An Essential Guide to SWOT Analysis.” http://formswift.com/swot-analysis-guide



Indiatsu, C. M., Mwangi, M. S., & Mandere E., N. (2014). The Application of Porter’s Five Forces Model on Organization Performance: A Case of Cooperative Bank of Kenya Ltd. European Journal of Business and Management, 6 (16), 75-85, from http://www.iiste.org/ Journals/index.php/EJBM/article/view/13364



Williams, P., & Naumann, E. (2011). Customer satisfaction and business performance: a firm

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http://dx.doi.org/10.1108 /08876041111107032

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