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The chapter mentions major theoretical bases to apply for analyzing practical situation of VNPT and then formulating the development strategy for it in the following chapters. The section consists of the definition of strategy; strategic management process, structural analysis of the competitive environment and selection of development strategies.
2.1. Definition of strategy
Starting from its military root, strategy, ever considered as "the science of planning and directing military operations", is not a new term. However, applications of this concept into business area is a breakthrough idea took place in the later half of this century. In the decades of 1960s and 1970s, most management definitions of strategy by many authors was emphasized on the planning theme as an important component. Alfred Chandler has defined strategy as "the determination of the basic long-term goals and objectives of a enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals". The main idea in Chandler's definition is that strategy involves a rational planning process. The organization is depicted as choosing its goals, identifying courses of action (or strategy) that best enable it to achieve its goals, and allocating resources accordingly. Similarly, Quinn defined strategy as "the pattern or plan that integrates an organization's major goals, policies and action sequences into a cohesive whole". Finally, Glueck defined strategy as "a unified, comprehensive, and integrated plan designed to ensure that the basic objectives of the enterprise are achieved." (Hill / Jones, 1989)
The concept of strategy has become one of the everyday words of managers during the past twenty years, and the practice of strategic planning is now widespread among large and medium-sized companies. This interest in strategy was caused by growing realization that the company's environment has become progressively changeable and discontinuous from the past and that, as a result, objectives alone are insufficient as decisions rules for guiding the company's strategic reorientation as it adapts to changing challenges, threats and opportunities.
The hierarchy of strategies:
Instead of a single comprehensive strategy, most organizations pursue a hierarchy of interrelated strategies, each formulated at a different level of the firm. The three major levels of strategy in most large, multi-product organizations are (Source: Johnson/Scholes,1993):
At the corporate level, managers must coordinate the activities of multiple business units. Thus, decisions about the organization's scope and appropriate resource deployments across its various divisions or businesses are the primary focus of corporate strategy.
Attempts to develop and maintain distinctive competencies at the corporate level tend to focus on generating superior financial, capital, and human resources; designing effective organization structures and processes; and seeking synergy among the firm's various businesses. Synergy can become a major competitive advantage in firms where related businesses reinforce one another by sharing corporate staff, R&D, financial resources, production technologies, distribution channel, or marketing programs.
A major issue addressed in a business strategy is how to achieve and sustain a competitive advantage, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning that can be used in different industry settings.
Functional - level strategy:
It is a plan of action to strengthen an organization's functional and organizational resources, as well as its coordination abilities, in order to create core competence
2.2. Strategic management process
Strategic management is a fast-developing field of study. It looks at the corporation as a whole and attempts to explain why some firms develop and thrive while others stagnate and go bankrupt. Strategic management is a stream of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives. The strategic management process is the way in which strategists determine objectives and make strategic decisions.
The process of strategic management involves 3 basic stages: (1) strategy formulation, (2) strategy implementation, and (3) evaluation and control. Different stages of the strategic management process at business level are visualized by the Strategic Management Model in Figure 2.1.
Figure 2.1: Strategic Management Model
Based on the context of this study, the focus will be on the strategy formulation process.
Strategy formulation is often referred to as strategic planning or long-range planning. Regardless of the term used, the process is primarily analytical, not action-oriented. As shown in the Strategic Management Model, the formulation process is concerned with developing a corporation's mission, objectives, strategy, and policies. In order to do this, corporate strategy makers must scan both the external and internal environments for needed information on strategic factors.
The first 4 steps commonly found in strategy formulation are a series of interrelated activities:
Step 1: Scanning of the external environment to locate strategic opportunities and threats.
Step 2: Scanning of the internal corporate environment to determine strategic strengths and weaknesses.
Step 3: Analysis of the strategic factors from step 1 and 2 to
+ pinpoint problem areas, and
+ review and revise the corporate mission and objectives as necessary.
Step 4: Generation, evaluation, and selection of the best alternative strategy appropriate to the analysis conducted in step 3.
(Source: Wheelen / Hunger, 1988)
The above strategy formulation process can be divided into 2 substages:
The first substage is the situation analysis. Beginning with an evaluation of current performance and ending with the review and possible revision of mission and objectives, this substage includes step 1 through 3.
The second substage is the process of generation, evaluation, and selection of the best alternative strategy. This substage is step 4.
2.3. External analysis
The first component of the strategic management process is the analysis of the organization's external operating environment. The objective of the external analysis is to identify strategic opportunities and threats in the organization's operating environment. Two interrelated environments should be examined at this stage: the national macroenvironment and the industrial environment.
Analyzing the national macroenvironment requires an assessment of whether the national context within which a company operates facilitates the attainment of a competitive advantage in the global market place. The macroenvironment consists of examining macroeconomic, social, government, legal, international, and technological factors that may affect the organization.
Analyzing the industry environment requires an assessment of the competitive structure of the organization's industry, including the competitive position of the organization and its major rivals, as well as the stage of industry development. One of the method to analyze the industry environment is using Micheal Porter 5 forces Model.
Micheal Porter 5 forces - Analysis of the competitive environment
Competitive environment analysis or Industry analysis is an important skill related to the environmental scanning step in the strategic management process. Periodically, managers need to develop a formal comprehensive analysis - a strategic industry analysis. The analysis includes an overview of strategic forces affecting a target industry, an analysis of various companies in the industry, forecasts and recommendations.
A useful guide for strategic industry analysis is provided by Porter. He created a model, calling it the five forces model of competition, as a strategic management technique for established profit-seeking companies, as shown in Figure 2.2. This is essentially a structural method of examining an organization or industry in order to provide a clear understanding of the factors that affect a business.
Figure 2.2: Porter's 5 forces Model
1. The Threat of Entry
New entrants to an industry tend to make it more competitive. The additional competitiveness may be due to a number of factors including: the additional capacity which they bring with them, their attempts to build market share, or increased costs due to the building up of the costs of the factors of production.
However, the effects of new entrants materialize, it is frequently in the interests of existing competitors to deter potential new entrants by making their prospects look as unattractive as possible. This can be done in two major ways - through the erection of barriers to entry and or through the threat of severe retaliation.
Clearly, it is in the interests of existing firms to have as high entry barriers as possible. Porter (McNamee, 1987) lists major barriers to entry which are:
Economies of scale
Access to distribution channel
Cost disadvantages independent of scale, for example: proprietary knowledge, etc.
2. The Power of Buyers
Buyers can be viewed as a competitive threat when they force down prices or when they demand higher quality and better service (which increases operating costs). Whether buyers are able to make demands on a company depends on their power relative to that of the company. According to Porter, buyers are most powerful in the following circumstances:
Buyers are few in number and large relative to sellers
Buyers purchase in large quantities.
The supply industry depends on them for a large percentage of its total orders.
Buyers can switch orders between supply companies at a low costs, thereby playing off companies against each other to force down prices.
It is economically feasible for them to purchase the input from several companies at once.
Buyers have the potential for backward integration.
The buyers' product is not strongly affected by the quality of the suppliers' product
The buyer has full information.
(Source: Hill / Jones, 1989)
3. The Power of Suppliers
Powerful suppliers can have the same adverse effects upon profitability as powerful buyers. The big difference is the sources of their power - it is really the opposite of the sources of buyer power. Thus suppliers tend to be powerful when the following conditions obtain:
There are few of them.
There are few substitutes.
The industry supplied is not an important customer
The suppliers' product is an important component to the buyer' s business
The supplier's product is differentiated
Suppliers can integrate forward.
4. The Threat of Substitutes
Substitutes, or alternative products that can perform the same function, limit the price that an industry can charge for its products. Substitutes are not always perceived by an industry to be present, and indeed may only be noticed when it is too late to arrest their dominance. One typical example, which illustrates the rise of a substitute product, is the current increasing proliferation of low cost microcomputers plus low cost easy to use business packages in such areas as accounting, data base management and word processing. This "product" has adversely affected the "industry" of specialist programmers and specialist computer bureaux. It seems likely that this trend will continue.
5. Competitive Rivalry
Competitors will also be concerned with the degree of rivalry between themselves in their own industry. How intense is this competition? What is it based on? Is it likely to increase or decrease in intensity? How can it be reduced? All these are questions which need to be thought about in the process of strategic analysis. The degree of rivalry is likely to be based on the following:
The extent to which competitors in the industry are in balance. What ever their number, where competitors are of roughly equal size there is a danger of intense competition as one competitor attempts to gain dominance over another. Conversely, the most stable markets tend to be those with dominant organizations within them.
A market in slow growth - particularly one which is entering its maturity stage and where competitors are keen to establish themselves as market leaders - is likely o be high competitive.
High fixed costs in an industry, perhaps through high capital intensity or high costs of storage, are likely to result in competitors cutting prices to obtain the turnover required. This can result in price wars and very low margin operations.
If the addition of extra capacity is in large increments then the competitor making such an addition is likely to create at least short term over-capacity and increased competition.
Again the importance of differentiation is clear. If a product or service is not differentiated then there is little to stop customers switching between competitors, which in turn raises the degree of rivalry between them. This is sometimes referred to as a "commodity market" situation.
Where there are high exit barriers to an industry, there is again likely to be the persistence of excess capacity and consequently increased competition.
(Source: McNamee, 1987)
2.4. Internal Analysis
Internal analysis, the second component of the strategic management process, serves to pinpoint the strengths and weaknesses of the organization. Building and maintaining a competitive advantage requires a company to achieve superior efficiency, quality, innovation, and customer responsiveness. A company's strengths lead to superiority in these areas, whereas a company's weaknesses translate into inferior performance.
2.5. SWOT analysis
The next component requires generating a series of strategic alternatives, given the company's internal strengths and weaknesses, and its external opportunities and threats. The comparison of strengths, weaknesses, opportunities and threats is normally referred to as a SWOT analysis. The central purpose of the SWOT analysis is to identify strategies that align, fit, or match a company's resources and capabilities to the demands of the environment in which the company operates. To put it another way, the purpose of the strategic alternatives generated by a SWOT analysis should be to build on a company's strengths in order to exploit opportunities, counter threats, and correct weaknesses.
Strengths: are the internal factors of a company that help to gain the targeted objective. Depending on the objective, a internal factor may be either positive or negative. Factors may include human resource, financial management, sale&marketing or R&D.
Weaknesses: are the internal factors of a company that prevent from achieving the anticipated objective. Factors may include production, marketing, management,.. it include any internal variable that affect to the strategy of company.
Opportunities: are external conditions which are helpful to achieve the company's objective. Conditions might include political factor, legal factor, economic, industry environment or technology.
Threats: are external conditions which damage to achieve the company's objective. Conditions might include factor, legal factor, economic, industry environment or technology.
To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below:
S-O strategies pursue opportunities that are a good fit to the company's strengths.
W-O strategies overcome weaknesses to pursue opportunities.
S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.
W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.
Figure 2.3: SWOT Matrix
2.6. Selecting development strategy
As soon as completing the tasks of identification of the most relevant competitors, of selection of the critical success factors and of developing a competitive profile, companies have to select a strategy that is most appropriate for their development. Options about development strategies involve decisions about three elements that are depicted in Figure 2.4.
Joint development /alliances
Figure 2.4: Development strategies
(Source: Johnson / Scholes, 1993)
2.6.1. Generic Strategies
Cost leadership strategy
A cost leadership strategy, where "a firm sets out to become the low-cost producer in its industry. A low-cost producer must find and exploit all sources of cost advantage. Low-cost producers typically sell a standard product and place considerable emphasis on reaping scale or absolute cost advantage from all sources. If a firm can achieve and sustain overall cost leadership, then it will be an above-average performer in its industry provided it can command prices at or near the industry average" (Source: Porter, 1980). The cost leaders are likely to earn above-average return. The company can achieve a cost leader position by the combination of product/market/distinctive competence.
A differentiation strategy is defined as seeking "to be unique in its industry along some dimensions that are widely valued by buyers. It is rewarded for its uniqueness with a premium price. A firm that can achieve and sustain differentiation will be an above-average performer in its industry if its price premium exceeds the extra costs incurred in being unique. The logic of the differentiation strategy requires that a firm choose attributes in which to differentiate itself that are different from its rivals" (Source: Porter, 1980).
These two generic ways can be combined with the market scope in which the firms try to achieve competitive advantage. This leads to the focus strategy, according to Porter, which is based on "the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others". There are two variants here, "in cost focus a firm seeks cost leadership position in its target, while in differentiation focus a firm seeks differentiation in its target segment" (Source: Porter, 1980).
2.6.2. Alternative Direction
Essentially, a firm can go in two major directions in seeking future growth: expansion of its current businesses and activities or diversification into new businesses through either internal business development or acquisition.
Market penetration: One way current businesses expand is by increasing their share of existing markets. This typically involves making product or service improvement, cutting costs and prices, or outspending competitors on such things as advertising and consumer or trade promotions. For example, Compaq is pursuing a combination of these actions to improve customer value and become the market share leader in the worldwide PC market. A second approach to improving a business's penetration of existing markets encourages current customers to use more of the product, use it more often, or use it in new ways.
Product development: Another way for businesses to grow is to develop product-line extensions or new product offerings aimed at existing customers.
Market development: Perhaps the growth strategy with the greatest potential for most companies is the development of new markets for their existing products or services, particularly through expansion into global markets.
Firms also seek growth by diversifying their operations. This is typically riskier than the various expansion strategies because it involves learning new operations and dealing with unfamiliar customer groups.
Vertical integration: is one way for corporations to diversify their operations. Forward integration occurs when a firm moves downstream in terms of the product flow, as when a manufacture integrates by acquiring a wholesaler or retail outlet. Backward integration occurs when a firm moves upstream by acquiring a supplier. Integration gives a firm access to scarce or volatile sources of supply or tighter control over the marketing, distribution, and servicing of its products.
Related (concentric) diversification: occurs when a firm internally develops or acquires another business that does not have products or customers in common with its current businesses but that might contribute to internal synergy through the sharing of production facilities, brand names, R&D know-how, or marketing and distribution skills.
Unrelated diversification: The motivations for unrelated diversification are primarily financial rather than operational. By definition, an unrelated diversification involves two businesses that do not have any commons in terms of products, customers, production facilities, or functional areas of expertise. Such diversification is most likely to occur when a disproportionate number of a firm's current businesses face decline due to decreasing demand, increased competition, or product obsolescence; the firm new avenues to provide future growth.
Diversification through organizational relationships or networks: Recently some firms have attempted to gain some of the benefits of market expansion or diversification while simultaneously focusing more intensely on a few core competencies. They try to accomplish this feat by forming relationships or organizational networks with other firms instead of acquiring ownership.
Other strategies in action
Joint Venture: is a popular strategy that occurs when two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunities. Often, the two or more sponsoring firms form a separate organization and have shared equity ownership in the new entity.
Retrenchment: sometimes called a turnaround or reorganization strategy. Retrenchment is designed to fortify an organization's basic distinctive competence.
Divestiture: Selling a division or part of an organization is called divestiture strategy. Divestiture is often used to raise capital for further strategic acquisitions or investment. Divestiture can be part of an overall retrenchment strategy to rid an organization of businesses that are unprofitable, or that require too much capital, or that do not fit well with the firm's other activities.
Liquidation: Selling all of a company's assets, in parts, for their tangible worth is called liquidation. Liquidation is recognition of defeat and consequently can be an emotionally difficult strategy. However, it may be better to cease operating than to continue losing large sum of money.
2.6.3. The Boston Consulting Group Approach and Strategic Choices
The purpose of identifying the company's strategic business units is to develop separate strategies and assign appropriate funding to the entire business portfolio. Senior managers generally apply analytical tools to classify of their SBU according to profit potential. One of the best-known business portfolio evaluation models is the Boston Consulting Group model, a leading management consulting firm. It's shown in Figure 2.5.
The market growth rate on the vertical axis indicates the annual growth rate of the market in which the business operates. Relative market share, which is measured on the horizontal axis, refers to the SBU's market share relative to that of its largest competitor in the segment. It serves as a measure of the company's strength in the relevant market segment. The growth-share matrix is divided into four cells, each indicating a different type of business (Source: Henderson, 1968):
Question marks are businesses that operate in high-growth markets but have low relative market shares. Most businesses start off as question marks as the company tries to enter a high-growth market in which there is already a market leader. A question mark requires a lot of cash because the company is spending money on plant, equipment, and personnel. The term question mark is appropriate because the company has to think hard about whether to keep pouring money into this business.
Strategic options for question marks include:
- Market penetration
- Market development
- Product development
Which are all intensive strategies or divestment.
Stars Successful question marks become stars. i.e. market leaders in high growth industries. However, investment is normally still required to maintain growth and to defend the leadership position. Stars are frequently only marginally profitable but as they reach a more mature status in their life cycle and growth slows, returns become more attractive. The stars provide the basis for long term growth and profitability.
Strategic options for stars include:
- Integration - forward, backward and horizontal
- Market penetration
- Market development
- Product development
- Joint ventures.
Cash cows These are characterised by high relative market share in low growth industries. As the market matures the need for investment reduces. Cash Cows are the most profitable products in the portfolio. The situation is frequently boosted by economies of scale that may be present with market leaders. Cash Cows may be used to fund the businesses in the other three quadrants.
It is desirable to maintain the strong position as long as possibleand strategic options include:
- Product development
- Concentric diversification
- If the position weakens as a result of loss of market share or market contraction then options would include..
- Retrenchment (or even divestment)
Dogs These describe businesses that have low market shares in slow growth markets. They may well have been Cash Cows. Often they enjoy misguided loyalty from management although some Dogs can be revitalised. Profitability is, at best, marginal.
Strategic options would include:
- Retrenchment (if it is believed that it could be revitalised)
- Divestment (if you can find someone to buy!)
Successful SBUs move through a life cycle, starting as question marks and becoming stars, then cash cows, and finally dogs. Given this life-cycle movement, companies should be aware not only of their SBUs' current positions in the growth-share matrix (as in a snapshot), but also of their moving positions (as in a motion picture). If an SBU's expected future trajectory is not satisfactory, the corporation will need to work out a new strategy to improve the likely trajectory.