Topic 2: Strategy

Welcome all of you to chapter 4 - Planning in Management subject and topic 4.2 –
strategies

For this topic, we will define what strategy is and its roles. Then, we discuss the ways to
create a competitive advantage. And final the types of strategies are distinguished in the
topic.

Firstly, what is strategies meaning? Strategy was defined a cluster of decisions about
what goals to pursue, what actions to take, and how to use resources to achieve goals.
Particularly, strategy is the plans for how the organization will do what it’s in business to
do, how it will compete successfully, and how it will attract and satisfy its customers in
order to achieve its goals and strategic management is what managers do to develop the
organization’s strategies. It’s an important task involving all the basic management
function planning, organizing, leading, and controlling.

Why is strategic management so important? There are three reasons. The most significant
one is that it can make a difference in how well an organization performs. Why do some
businesses succeed and others fail, even when faced with the same environmental
conditions? Research has found a generally positive relationship between strategic
planning and performance. In other words, it appears that organizations that use strategic
management do have higher levels of performance. And that fact makes it pretty
important for managers.

For example, the discount retail industry is a good place to see what strategic
management is all about. Walmart and Kmart Corporation (now part of Sears Holdings)
have battled for market dominance since 1962, the year both companies were founded.
The two chains have other similarities: store atmosphere, names, markets served, and
organizational purpose. Yet, Walmart’s performance (financial and otherwise) has far
surpassed that of Kmart. Walmart is the world’s largest retailer and Kmart was the largest
retailer ever to seek bankruptcy protection. Why the difference in performance? Because
of different strategies and competitive abilities. Walmart has excelled by effectively
managing strategies while Kmart has struggled by not effectively managing its strategies.

Following the example, we can see the role of setting up strategy and we also can figure
out that analyzing competitors is necessary to compete in its business. For a small
organization in only one line of business or a large organization that has not diversified
into different products or markets, its competitive strategy describes how it will compete
in its primary or main market. For organizations in multiple businesses, however, each
business will have its own competitive strategy that defines its competitive advantage, the
products or services it will offer, the customers it wants to reach, and the like.

Developing an effective competitive strategy requires an understanding of competitive

advantage, which is what sets an organization apart—that is, its distinctive edge. That
distinctive edge can come from the organization’s core competencies by doing something
that others cannot do or doing it better than others can do it. For example, Southwest
Airlines has a competitive advantage because of its skills at giving passengers what they
want convenient and inexpensive air passenger service. Or competitive advantage can
come from the company’s resources because the organization has something its
competitors do not have. For instance, Walmart’s state-of-the-art information system
allows it to monitor and control inventories and supplier relations more efficiently than its
competitors, which Walmart has turned into a cost advantage.

Many important ideas in strategic management have come from the work of Michael
Porter. One of his major contributions was explaining how managers can create a
sustainable competitive advantage. An important part of doing this is an industry analysis,
which is done using the five forces model. In any industry, five competitive forces dictate
the rules of competition. Together, these five forces determine industry attractiveness and
profitability, which managers assess using these five factors:

• The level of rivalry among organizations in an industry: The more that companies
compete against one another for customers—for example, by lowering the prices of their
products or by increasing advertising—the lower the level of industry profits (low prices
mean less profit).

• The potential for entry into an industry: The easier it is for companies to enter an
industry—because, for example, barriers to entry, such as brand loyalty, are low—the
more likely it is for industry prices and therefore industry profits to be low.

• The power of large suppliers: If there are only a few large suppliers of an
important input, then suppliers can drive up the price of that input, and expensive inputs
result in lower profits for companies in an industry.

• The power of large customers: If only a few large customers are available to buy
an industry’s output, they can bargain to drive down the price of that output. As a result,
industry producers make lower profits.

• The threat of substitute products: Often the output of one industry is a substitute
for the output of another industry (plastic may be a substitute for steel in some
applications, for example; similarly, bottled water is a substitute for cola). When a
substitute for their product exists, companies cannot demand high prices for it or
customers will switch to the substitute, and this constraint keeps their profits low.

Today the competition is tough in most industries, whether companies make cars, soup,
computers, or dolls. The term hyper competition applies to industries that are
characterized by permanent, ongoing, intense competition brought about by advancing
technology or changing customer tastes and fads and fashions.38 Clearly, planning and
strategy formulation is much more difficult and riskier when hyper-competition prevails
in an industry.

Once managers have assessed the five forces and done a SWOT analysis, they’re ready to
select an appropriate competitive strategy—that is, one that fits the competitive strengths
(resources and capabilities) of the organization and the industry it’s in. According to
Porter, no firm can be successful by trying to be all things to all people. He proposed that
managers select a strategy that will give the organization a competitive advantage, either
from having lower costs than all other industry competitors or by being significantly
different from competitors.

According to Porter, to obtain these higher profits managers must choose between two
basic ways of increasing the value of an organization’s products: differentiating the
product to increase its value to customers or lowering the costs of making the product.
Porter also argues that managers must choose between serving the whole market or
serving just one segment or part of a market. Based on those choices, managers choose to
pursue one of four business-level strategies: low cost, differentiation, focused low cost, or
focused differentiation

The two approaches to strategies that I am going to mention are: differentiation

(specialty) and low-cost strategies (commodity). In a low- cost strategy, the true winner
is the company with the actual lowest cost in the market place.

For example, if two companies make essentially identical products that sell at the same
price in the market place, the one with the lower costs has the advantage of a higher level
of profit per sale. By having this advantage, the low-cost company is able to do a number
of things to maintain or increase its market share. It can invest more in marketing. It can
pay for better positions in retail stores relative to its higher cost competitor. It can lower
price, thus squeezing its competitor’s margins and profits. It can invest more in research
and development, allowing it to improve the performance of its product. The bottom line
here is that the higher cost competitor is allowed to stay in the market at the sole
discretion of the lower cost competitor, because, if it so choses, the lower cost competitor
could drop its price to the point where the higher cost competitor would have to sell at a
loss in order to remain in the market. Eventually, the higher cost competitor could be
driven out of that business. You need to understand what percentage of the market is
buying solely on price. This often happens with mature products. In the low-cost
strategy, a company must have a thorough understanding of costs and how to continually
reduce them. The company must be willing to standardize its offerings in order to
manage costs, which implies that exceptions requested by prospective customers must be
limited or excluded in order to keep costs down.

A company that competes by offering unique products that are widely valued by
customers is following a differentiation strategy. Product differences might come from
exceptionally high quality, extraordinary service, innovative design, technological
capability, or an unusually positive brand image. When a firm pursues differentiation
strategy, it attempts to become unique in the industry, by offering those products and
services, which have value to the customers. In this strategy, the firm picks one or more
such dimensions that are regarded as important by the customer’s flock. In this way, the
firm succeeds in creating a unique image in the market and gets the premium price for its
uniqueness. Practically any successful consumer product or service can be identified as
an example of the differentiation strategy; for instance, Nordstrom (customer service);
3M Corporation (product quality and innovative design); Coach (design and brand
image); and Apple (product design)

What happens if an organization can’t develop a cost or a differentiation advantage?

Porter called that being stuck in the middle and warned that’s not a good place to be. An
organization becomes stuck in the middle when its costs are too high to compete with the
low-cost leader or when its products and services aren’t differentiated enough to compete
with the differentiator. Getting unstuck means choosing which competitive advantage to
pursue and then doing so by aligning resources, capabilities, and core competencies.
According to Porter’s theory, managers cannot simultaneously pursue both a low-cost
strategy and a differentiation strategy. Porter identified a simple correlation:
Differentiation raises costs and thus necessitates premium pricing to recoup those high
costs. Organizations stuck in the middle tend to have lower levels of performance than do
those that pursue a low-cost or a differentiation strategy. To avoid being stuck in the
middle, top managers must instruct departmental managers to take actions that will result
in either low cost or differentiation.
Both the differentiation strategy and the low-cost strategy are aimed at serving many or
most segments of a particular market, such as for cars, toys, foods, or computers. Porter
identified two other business-level strategies that aim to serve the needs of customers in
only one or a few market segments. Managers pursuing a focused low-cost strategy serve
one or a few segments of the overall market and aim to make their organization the
lowest-cost company serving that segment. By contrast, managers pursuing a focused
differentiation strategy serve just one or a few segments of the market and aim to make
their organization the most differentiated company serving that segment

That’s all for chapter 4 – planning. Now we know planning is a three-step process: (1)
determining an organization’s mission and goals; (2) formulating strategy; and (3)
implementing strategy. Managers use planning to identify and select appropriate goals
and courses of action for an organization and to decide how to allocate the resources they
need to attain those goals and carry out those actions. Then, determining the
organization’s mission requires that managers define the business of the organization and
establish major goals. Strategy formulation requires that managers perform a SWOT and
five forces analysis. After that managers develop strategies to help the organization either
add value to its products by differentiating them or lowering the costs of value creation.