As the organization of all sizes approach the next millennium, they must prepare for an increasingly complex future. Global competition, rapid technological changes, cross-border strategic alliances, the emergence of new industries and the rising prosperity of developing markets are redefining the competitive landscape of the world. All these forces represent both opportunities and challenges for the organization to create new sources of competitive advantage that will enable them to participate and thrive in what will be some of the most exciting and yet tough times ahead. These fast changing environments also threaten to undermine the long-held competitive advantages of the organization unable to mount an effective and timely response. In order to survive and compete in this environment the organization needs to constantly monitor its environment and change accordingly to build and sustain competitive advantage. In this condition the company has to evolve a strategy in which it will be able to provide a growing range of consumer products and services will be continuously redefined, tailored, and customized to each person's tastes and preference better than its competitors. The firm's ability to respond to change will become an increasingly vital ingredient to competitive advantage
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in future years of accelerated environmental change. Strategy refers to the ideas, plans and actions used to help firms compete successfully and achieve competitive advantage. The essence of strategy is to match strengths and distinctive competence with terrain in such a way that the organization enjoys competitive advantage over rivals competing in the same environment. In my assignment I will be discussing and analyzing the relevance of strategic management process, the strength and weakness of the approach to implement a particular strategy in this current situation.
Strategy Management Process
"Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment." (Lamb, 1984:ix).
Strategy management process has a five component approach to promote successful organization performance. Five components are:
Vision formulation which leads to Mission.
Then the Mission is converted into performance Objectives.
To achieve objectives organization develops Strategies.
Evaluation of the performance.
For Example: McDonald's corporation vision is to dominate the global food service industry. The performance standard for customer satisfaction while increasing market share and profitability through their convenience, value and execution strategies.
It is an environment which gives organization their meaning of survival. In the private sector satisfied customer is what keeps an organization in business, in the public sector it is government, clients, patients that play the same role. The environment is also the source of threats. For example: Hostile shifts in market demand, new regulatory requirements, revolutionary, technologies or the entry of new competitors. Environmental change can be fatal for organization. The frame work for analyzing is organized in a series of 'Layers'.
It consist of broad environmental factors that impact to a greater or lesser extent on almost all organization. PESTEL frame work can be used to identify the future trend in Political, Economics, Social, Technology, Environmental and Legal. PESTEL analysis provides the broad 'Data' which identify the Key drivers to change.
PESTEL Frame Work: It provides a comprehensive list of influence on the possible success or failure of particular strategies. Politics highlights the role of Government. Economics refers to Macro Economics factors such as exchange rates, business cycle and differential economics growth rate, Social influences include changing culture and demographic. Technology influences refers to innovations such as internet, environmental stands especially for 'Green' issues such as pollution and waste. Finally Legal embraces legislative constraints or changes. Organization always analyses how these factors are changing now and how they are likely to change in future, drawing out implication for the organization, these factors are linked together. For Example: Technology developments may simultaneously change economic factors.
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As I have mentioned how forces in the Macro Environment might influence the success or failure of an Organization's strategies. An important aspect of this for most Organization will be competition within their industry or sector. Economic theory defines an industry as a group of firms producing the same principal product. The concept of an industry can be extended into the public services through the idea of a sector, from a strategic management perspective it is useful for Organization to understand the competitive forces in their industry or sector.
Five Force Model: Michael porter's five frame work was originally developed as a way of attractiveness (profit potential) of different industries, the five forces constitute an industry 'Structure'. Industry structure analysis with the five forces framework is of value to most organizations. It can be provide a useful starting point for strategic analysis even where profit criteria may not apply. As well as assessing the attractiveness of an industry or sector the five forces can help set an agenda for action on the various 'pinch points' that they identify. The five forces are:
Threat of Entry
Threat of Substitutes
Power of Buyers
Power of Suppliers
Extent of Rivalry
Porters five forces at Tesco PLC
How Porters five forces can be applied to the problems facing Tesco PLC, including an investigation of the threat of substitutes from other supermarkets, buyer power in relation to grocery purchases, grocery supplier power, and the power of the customer at the till.
For instance, Tesco has competition from companies like Sainsbury that can provide substitutes for their goods. This drives the prices of groceries down in both companies.Â
Buyer power also acts to force prices down. If beans are too expensive in Tesco, buyers will exercise their power and move to Sainsbury. Fortunately for Tesco, there are few other large supermarket companies. This means the market is disciplined - the supermarkets have a disciplined approach to price setting. Discipline stops them destroying each other in a profit war.Â
Supplier power is an important part of the Porters five forces model. If retailers don't pay the price, they don't get the goods to sell. But large supermarkets, like Tesco, have an overwhelming advantage over the small shopkeeper-they can dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with a much smaller market for their produce.
Tesco, Asda, Sainsbury and other supermarket chains put up considerable barriers to entry. Anyone starting up a new supermarket chain has barriers imposed on them, implicitly or explicitly, by the existing supermarkets. For instance, Tesco may have cornered the market for certain goods; the new supermarket will not be able to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale. The amount it pays suppliers, per-item, is a lot less than the corner shop. It achieves this, partly, through buying large volumes of goods. A small supermarket chain can only buy a relatively small volume of goods, at greater expense.
Competitor's analysis is concerned with the five basic attributes of the competitor:
Its comparative market strength in relation to the key competences required in the industry.
Its resources and core competences.
Its current and possible future strategy.
Its culture and the assumptions it makes about itself and the industry.
Its objectives and goals both at corporate and at business unit level.
Competitive Market Strength: It is essential to identify the company's main competitors and collect sufficient data and opinions in relation to them to make a comparative assessment of each of them and of the company itself. Competitor analysis needs to be carried out on a segment by segment basis.
It is concerned with identifying the strength and weaknesses of the company, with an analysis of the company's external environmental, internal analyses gives managers the information they need to choose the business model and strategies that will enable their company to attain a sustained competitive advantage. Internal analysis is a three step process, First managers must understand the process by which companies create value for customers and profit for themselves, they need to understand the role of resources capabilities and distinctive competencies in this process. Second they need to understand how important superior efficiency, innovation, quality and responsive to customers are in creating value and generating high profitability. Third, they must be able to analyze the sources of there company's competitive advantage to identify what is making the profitability of their enterprise and where opportunities for improvement needed. In other words we can say that, they must be able to identify how the 'Strength' of the enterprise boost its profitability and how any 'Weaknesses' lower profitability of enterprise.
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SWOT ANALYSIS: SWOT stands for, Strength, Weaknesses, Opportunities, and Threats. Swot analysis is a popular tool used by managers as an organizing framework for initiative information and as a means of summarizing and integrating more formal analyses about the external operating environment and an organization's current resources and capabilities. The care has to be taken to avoid several potential pitfalls. Some of which can also be applied to other frame works tools to analysis.
A SWOT analysis can result in long list of observation which provide little overall insight or clarity about required action.
A further danger is that manager might conceive of strengths and weaknesses in term of the strategy they aim to implement rather than that which is currently exists. In this sense it is important that the strength and weaknesses are considered in term of current realized strategy rather then just future intended strategy.
The above table shows the SWOT analysis of IBM. It has enviable strengths in market leadership and responding to new trends, in addition to having billions $USD to spend as necessary.
The weaknesses that IBM faces are skills shortages in critical areas; especially in new products and services IBM wishes to dominate. Timing is critical, waiting too long to get employees up to speed on needed puts IBM at risk of losing business to lower-cost rivals. Motivating and directing employees in a learning corporation requires shaping and driving a common set of values. A lack of competitive advantage in retaining and deploying skilled employees shortens the time when IBM can count on the wide margins driving profits.
The strength and weaknesses are statement of the internal capabilities of an organization. Strength would be an internal resource which would enable an organization to deal effectively with its business environment. For example TESCO have a close and good links with there customer. An internal weakness would leave opportunities poorly accounted for or not addressed at all. For example a weak distribution system might hinder sales of popular and fast moving product.
Opportunities and Threats exist outside of the organization in many different areas. For Example: competitors moves, Government legislation, technological advances and changing customer needs. Environmental opportunities and threats are presented at the same in the market for all competitors.
The aim of SWOT analysis is to match likely external environmental changes with internal capabilities, to test these out and challenge how an organization can capitalize on new opportunities or defend itself against future threats.
There are three more critical issues an internal analysis. First, what factors influences the durability of competitive advantage? Second, why do successful companies often loose their competitive advantage? Third, how can companies avoid competitive failure and sustain their competitive advantage overtime?
DISTINCTIVE COMPETENCIES: It is a firm- specific that allow a company to differentiate its product or achieve substantially lower costs than its rivals and thus gain a competitive advantage. For Example: Toyota has distinctive competencies in the development and operation of manufacturing process. Toyota pioneered a whole range of manufacturing techniques, such as just-in-time inventory system, self managing teams and reduced setup times for complex equipment, these competencies is known as Toyota lean production system. Distinctive competencies arise from two complementary sources: Resources and Capabilities.
RESOURCES: It is a financial, physical, social or human, technological and organizational factor that allows a company to create value for its customers. Company resources can be divided into two types: Tangible and Intangible resources. `
Tangible Resources: Are physical entities, such as land, building, plant, equipment, inventory and money.
Intangible Resources: Are non-physical entities that are created by managers and other employees, such as brand names, the reputation of the company, the knowledge that employees have gained through experiences and the intellectual property of the company. Another important quality of resources that leads to a distinctive competency is that a valuable. In some way it helps to create strong demand for the company's product.
CAPABLITIES: It refers to a company's skill at co-coordinating its resources and putting to productive use. These skills reside in an organization's rules, routine and procedure. The style or manner through which it makes decision and manages its internal process to achieve organizational objectives. A company's capabilities are the product of its organizational structure, process and control system. They specific how and where decision are made within a company, kind of behavior the company reward, and company's culture norms and values. Capabilities are intangible, they reside not so much in individual as in the way individual interact, co-operate and make decision.
COMPETITIVE ADVANTAGE: A company has a competitive advantage over its rivals when its profitability is greater than the average profitability of all companies in its industry. It has sustained competitive advantage when it is able to maintain above- average profitability over a number of years. Distinctive competencies are a firm-specific strengths that allow a company to differentiate its products and achieve substantially lower costs than its rivals and thus gain a competitive advantage. Competitive advantage leads to a superior profitability. At most basic level, how profitable a company becomes depends on three factors: (1) the value customers place on the company's products, (2) the price that a company charges for its products (3) the costs of creating those products. The value customers place on a product reflects the utility they get from a product, the happiness or satisfaction gained from consuming or owning the product. Utility must be distinguished from price. Utility is something that customers get from product. Indeed, company's business model is the combination of congruent strategies aimed at creating distinctive competencies that(1) differentiate its product in some way so that its consumers derive more utility from them, which gives the company more pricing options (2) result in a lower cost structure, which also gives it a broader range of pricing choices. Achieving a sustained competitive advantage and superior profitability requires the right choices with regard to utility through differentiation and pricing given the demand condition in the company's market and the company's cost structure at different levels of output.
Production is concerned with the creation of goods or services. For physical products, when we talk about production, we generally mean manufacturing. For Example: the efficient production operations of Honda and Toyota help those automobile companies achieve higher profitability relative to competitors such as general motors. The production function can also perform its activities in a way that is consistent with high product quality, which leads to differentiation and lower costs.
This section is very important for every business organization, because the policy of implementation will be based on our choice; this gives a clear picture in the mind that how it will look like once it will be implemented. The corporate parent refers to the levels of management above that of the business units and therefore without interaction with buyers and competitors. In this section there are two central concerns. First, strategic decision about the scope of an organization. Scope decisions are about the diversity of product and the international or geographic diversity of the business units in a corporate portfolio. These are important decision because they raise significant implications about how scope and diversity are to be managed to create value. Second, central concern is how is value added at the corporate level as distinct from the business level in organization.
THE STRATEGIC CLOCK: Competitive strategy is concerned with the basis on which a business unit might achieve competitive advantage in its market. So, the strategy clock is an important concept in helping managers understand the changing requirements of their markets and the choices they can make about positioning and competitive advantage. There are five positions in the strategic clock:
Price Based Strategies: It is the no frill strategy, which combines a low price, low perceived product/service benefits and a focus on a price-sensitive market segment.
Differentiation Strategies: It is a broad option which seeks to provide products or services that offer benefits different from those of competitors and that are widely valued by buyers. The aim is to achieve competitive advantage by offering better products or services at the same price or enhancing margins by pricing slightly higher.
The Hybrid Strategy: It seeks simultaneously to achieve differentiation and a price lower than that of competitors. The success of the strategy depends on the ability to deliver enhanced benefits to customers together with low prices whilst achieving sufficient margins for reinvestment to maintain and develop the bases of differentiation.
Focused Differentiation: This strategy seeks to provide high perceived product or service benefits justifying a substantial price premium, usually to a selected market segment. In many markets these are described as premium products and are usually heavily branded.
Failure Strategy: This one which does not provide perceived value for money in terms of product feature, price or both. There is another basis of failure, which is for a business to be unclear as to its fundamental generic strategy such that it ends up being stuck in the middle.
THE TOWS MATRIX
This is a complementary way of generating option from this knowledge of an organization strategic position is known as TOWS matrix. This builds directly on the information about the strategic position that is summarized in a SWOT analysis. TOWS matrix is an important matching tool that helps managers develop four types of strategies: SO strategies, WO strategies, ST strategies, and WT strategies. Watching key external and internal factors is the most difficult part of developing a TOWS matrix and requires good judgment and there is no one best set of matches.
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STRENGTH - S
Use strengths to take advantage of opportunities
Overcome weaknesses by taking advantages of opportunities
Use strengths to avoid threats
Minimize weaknesses and avoid threats.
STRATEGY EVALUATION: Once the firm has considered the possible range of market and products in which it might compete, it needs to evaluate the various options and select amongst them. These are neatly listed by Johnson and scholes (1993) as suitability, feasibility and acceptability.
SUITABILITY: The proposed strategy needs to have a good prospect of achieving the company's proposed financial and other objectives. It also needs to be a strategy that is consistent with the company's mission statement. Ford has considered whether the launching of the Scorpio was a suitable strategy. It was launched to compete in the same market segment in which Mercedes, BMW, and Lexus are competitors.
FEASIBILITY: The proposed strategy has been judged to be broadly suitable. The consideration are whether the company is adequately equipped in terms of financial power, human and other resources, skills, technologies, organizational strength, that is core competences to carry out the strategy effectively.
ACCEPTABILITY: The third criterion of acceptability addresses the company's stake holders, it would be sufficiently happy with the proposed strategy to give it their support. The proposed strategy must be acceptable to the central stake holders, and the possible negative views of the others must be taken into account before the strategy is adopted. For Example: ford had already owned jaguar when they proposed to launch Scorpio, the Jaguar management might have found the launch unacceptable and opposed it. Strategy option should initially be considered from the view point of risk.
Strategy implementation is an important topic for both manager and employees at all levels to understand. Successful strategy implementation depends upon both a well managed organization and a solid base of committed competent personnel. Management can formulate any number of strategies to build competitive advantage, but the success of any given strategy is only as good as the organization and the people behind it. The effectiveness of implementation ultimately determines the success or failure of any given strategy. The strategy implementation refers to converting strategy into desired action and results. Strategy implementation is concerned with efforts to build a more effective organization. According to me among the many tools manager can use for strategy planning, scenario planning can be used as a tool for implementing the strategy. The manager constructs 'alternative futures', which consider the likely behavior of suppliers, competitors and consumers to built up an overall picture of possible competitive environments. Strategic analysis can then be undertaken on each of the scenarios, with different strategies developed for the different possible futures. The environment needs to be monitored to provide an insight into which of the scenarios is likely to be most appropriate. The challenge is 'thinking the unthinkable' i.e. identifying different possibilities in the environment and considering strategic responses. A scenario planning is essentially a qualitative approach and should involved detailed planning for at least three situations: (1) The worst-case scenario (environment turns very unfriendly): (2) The best-case scenario (where the operating and general environments are extremely favorable): and (3) the most likely case scenario (between the two extremes). The analysis should show how the organization would respond to each scenario and formalize this in terms of contingency plans. It must regularly scan the environment to check for signals that suggest the onset of a particular scenario.
For example: in the case of IBM it currently has a working process, but in order to energize value creation at IBM, a more focused vision and strategy is needed. Values in an area of critical attention and must be prevented from drifting. It is in danger of becoming an 'unconsciously competent organization' without a strict correction of its value.
In its worst case it can experience a natural limit of improvements in efficiency and cost reduction that is currently driving margins. Competitors take advantage of its isolated consultants.
In its best case it can increase its profit by both increasing revenue and lowering overhead, and differentiate their consulting services to raise entry barriers of rivals.
The challenge that managers have to face today is how he can implement the strategy in this ever changing environment. The implementation of any strategy will depend on the time it will take to adapt to the change. The strategy should be flexible to any change and the organization should be able to quickly adapt to it. The success of the organization will depend on the organizations ability to adapt to the changing environment. According to my point of view the strategic management process becomes more relevant in today's fast changing environment. It is better for the organization to have some strategy and be proactive rather than have no strategy at all and aimlessly drift. Strategy gives a sense of purpose and direction to the organization which is very important in the current situation of chaos. I conclude that the strategic management process is very much relevant in the today's environment and the survival and success of an organization will depend on the strategy it adopts which will be the best fit according to the organizations strength and opportunities in its surrounding environment.