Chapter 9 : Strategic Planning

Contents: 1. Meaning of Strategic Planning 2. Definition of Strategic Planning 3. Features of Strategic Planning 4. Importance of Strategic Planning 5. Planning vs strategy 6. Levels of strategy 7. Types of business level strategies 8. Industry structure and analysis : Michael Porter Five Forces Model

Strategy is a “military” term. It was Peter Drucker who pointed out the importance of strategic decision in 1955 in his book, “The Practice of Management”. Here he defined strategic decision as “all decision on business objectives and on the means to reach them.”

However the importance of the concept was fully realised when pioneers like Alfred Chandler and Michael Porter have developed the work strategic, which is regarded as the Classical Approach. It involved the use of formal and systematic design techniques. It concentrated on long-term plans and not concerned with implementation.

More or less it ignores the human element. It is also based on quantitative aspect and focused externally. On the other hand, later writers emphasised on human and qualitative aspect of strategy. They saw “strategy” as evolutionary. It showed that “organisational behaviour” as part of organisational processes.

Strategic Planning – Meaning Strategic planning means planning for strategies and implementing them to achieve organisational goals. It starts by asking oneself simple questions like- What are we doing? Should we continue to do it or change our product line or the way of working? What is the impact of social, political, technological and other environmental factors on our operations? Are we prepared to accept these changes etc.? Strategic planning helps in knowing what we are and where we want to go so that environmental threats and opportunities can be exploited, given the strengths and

weaknesses of the organisation. Strategic planning is “a thorough self-examination regarding the goals and means of their accomplishment so that the enterprise is given both direction and cohesion.” It is “a process through which managers formulate and implement strategies geared to optimising strategic goal achievement, given available environmental and internal conditions.” Strategic planning is formalisation of planning where plans are made for long periods of time for effective and efficient attainment of organisational goals. Strategic planning is based on extensive environmental scanning. It is a projection into environmental threats and opportunities and an effort to match them with organisation’s strengths and weaknesses. Planning is something we do in advance of taking action; that is, it is anticipatory decision making. It is a process of deciding what to do and how to do it before action is required. Strategic planning can be defined as a managerial process of developing and maintaining a viable fit between organization’s objectives, skills and resources and its changing environment. The company’s strategic plan is the starting point for planning. It serves as a guide to the development of sound sub-plans to accomplish the organizational objectives. The aim of strategic planning is to help a company select and organize its businesses in a way that would keep the company healthy in spite of unexpected changes in the environment. It purports to shape or reshape the company’s businesses and products so that they yield target profits and growth.

Strategic Planning – Definition Strategic planning is the process of determining a company’s long-term goals and then identifying the best approach for achieving those goals. Strategic planning is an organization’s process of defining its strategy or direction and making decisions on allocating its resources to pursue this strategy, including its capital and people. Strategic planning is a process to determine or re-assess the vision, mission and goals of an organization and then map out objective (measurable) ways to accomplish the identified goals.

Strategic planning is systematic, formally documented process for deciding what are the handfuls of key decisions that an organisation, viewed as a corporate whole must get right in order to thrive over the next few years. Strategic planning is a continuous and systematic process where people make decisions about intended future outcomes, how outcomes are to be accomplished, and how success is measured and evaluated. Strategic planning is the method by which a community continuously creates arti-factual systems to serve extraordinary purpose. Strategic planning is systematic process of determining goals to be achieved in the foreseeable future. It consists of – (i) Management’s fundamental assumptions about the future economic, technological, and competitive environments. (ii) Setting of goals to be achieved within a specified timeframe. (iii) Performance of SWOT analysis. (iv) Selecting main and alternative strategies to achieve the goals. (v) Formulating, implementing, and monitoring the operational or tactical plans to achieve interim objectives. Strategic planning is a coordinated and systematic process for developing a plan for the overall course or direction of the endeavour in order to optimizing the future potential. Strategic planning is a business process that many companies employ to identify critical success factors that set the course for future growth and profits. Defining Mission Statement: The mission statement is a short, concise statement that describes what the organization will strive to bring about — the reason why the company exists in terms of its impact on the rest of the world. Defining Vision Statement: One of the functions of strategic planning is to inspire people in the organization to work towards the creation of a new state of affairs. The vision is a means of describing this desired future, but it works best to inspire and motivate if it’s vivid — in other words, a vision should be a “picture” of the future. The visioning process is usually the very first step in the strategic planning process. Defining Role Statement: The mission statement would focus on results and outcomes, while the role statement gets more into the “how’s”.

A good way to think about this is to first state your mission, add a byline to it, and then add a role. For example, if the Mission of a startup organisation is to “go where no man has gone before” there might be a set of role statements (usually there will be more than one). For example – To go where no man has gone before by building new technologies and starships that can… Environmental Scan: In terms of organizations and strategic planning, an environmental scan involves considering the factors that will influence the direction and goals of an organization. And, it includes consideration of both present and future factors that might affect the organization, since; we’re planning for the future, not just the present. For example, an environmental scan might project that in the next ten years, the number of people (potential customers) between the ages of 18-24 will increase from 30% to 40%. That’s important information if we want to decide what kind of new products we might consider introducing into the marketplace. Should we work on developing products targeted at a dwindling seniors population? Or should we develop products to take advantage of the shift to a youth dominated market. The environmental scan forces us to look at these factors. Competitive Analysis: A competitive analysis involves looking at those that compete in the market place, and using information about the competitors to identify where organisational strengths are relative to those competitors. One of the principles for becoming competitive is to leverage one’s strengths with respect to competitors, and minimise the weaknesses. Strategic Planning Goals: Once we established a vision, mission and role, and done internal and external scans, we should have enough information to set goals for the period that our strategic plan covers. Goals in strategic planning can be either result oriented, or process oriented, although, it’s probably better to have results oriented goals. For example – increase share price by 5%, increase return on capital investments by 10%, reduce employee turnover by 10%, bring three new products to market, and register 3 new patents. Bad and non-strategic goals are, for example, become the most regarded company in our field (too vague, hard to measure, improve customer service (vague), hire and retain more talented staff (vague).

Strategic Planning – Features The following are the salient features of strategic planning: 1. Process of Questioning: It answers questions like where we are and where we want to go, what we are and what we should be. 2. Time Horizon: It aims at long-term planning, keeping in view the present and future environmental opportunities. It helps organisations analyse their strengths and weaknesses and adapt to the environment. Managers should be farsighted to make strategic planning meaningful. 3. Pervasive Process: It is done for all organisations, at all levels; nevertheless, it involves top executives more than middle or lower-level managers since top executives envision the future better than others. 4. Focus of Attention: It focuses organisation’s strengths and resources on important and high-priority activities rather than routine and day-to-day activities. It reallocates resources from non-priority to priority sectors. 5. Continuous Process: Strategic planning is a continuous process that enables organisations to adapt to the ever-changing, dynamic environment. 6. Co-Ordination: It coordinates organisations internal environment with the external environment, financial resources with non- financial resources and short-term plans with long- term plans.

Strategic Planning – Importance Strategic planning offers the following benefits: 1. Financial Benefits: Firms that make strategic plans have better sales, lower costs, higher EPS (earnings per share) and higher profits. Firms have financial benefits if they make strategic plans. 2. Guide to Organisational Activities: Strategic planning guides members towards organisational goals. It unifies organisational activities and efforts towards the long-terms goals. It guides members to become what they want to become and do what they want to do.

3. Competitive Advantage: In the world of globalisation, firms which have competitive advantage (capacity to deal with competitive forces) capture the market and excel in financial performance. This is possible if they foresee the future; future can be predicted through strategic planning. It enables managers to anticipate problems before they arise and solve them before they become worse. 4. Minimises Risk: Strategic planning provides information to assess risk and frame strategies to minimise risk and invest in safe business opportunities. Chances of making mistakes and choosing wrong objectives and strategies, thus, get reduced. 5. Beneficial for Companies with Long Gestation Gap: The time gap between investment decisions and income generation from those investments is called gestation period. During this period, changes in technological or political forces can disrupt implementation of decisions and plans may, therefore, fail. Strategic planning discounts future and enables managers to face threats and opportunities. 6. Promotes Motivation and Innovation: Strategic planning involves managers at top levels. They are not only committed to objectives and strategies but also think of new ideas for implementation of strategies. This promotes motivation and innovation. 7. Optimum Utilisation of Resources: Strategic planning makes best use of resources to achieve maximum output. General Robert E. Wood remarks, “Business is like war in one respect. If its grand strategy is correct, any number of tactical errors can be made and yet the enterprise proves successful.” Effective allocation of resources, scientific thinking, effective organisation structure, co-ordination and integration of functional activities and effective system of control, all contribute to successful strategic planning.

Strategic Planning – Limitations Strategic Planning in management is essential but there are practical limitations to its use. The reasons why people fall in strategic planning emphasise the practical difficulties encountered in planning. A number of limits within which planning has to operate make this undertaking difficult. Following are the limitations:

(1) Problems of Change: The factor works more as limiting factor in the light of changes in future conditions. In a complex and rapidly changing environment, the succession of new problems is often magnified by implications that make planning most difficult. The problem of change is more complex in long-range planning. Present conditions tend to weigh heavily in planning, and by overshadowing future needs, may sometimes results in error of judgment. Such factors as changing technology, consumer tastes and desires, business conditions, and many others change rapidly and often unpredictably. In such conditions, planning activities taken in one period may not be relevant for another period because the conditions in two periods are quite different. (2) Failure of People: There are many reasons why people fail in planning, both at the formulation level as well as implementation level. Some of the major failures are lack of commitment to planning, failure to develop, sound strategies, lack of clear and meaningful objectives, tendency to overlook planning premises, failure to see the scope of the plan, failure to see planning as a rational approach, excessive reliance on the past experience, failure to use the principles of limiting factors, lack of top management support lack of delegation of authority, lack of adequate control techniques, and resistance to change. These factors are responsible for either inadequate planning or wrong planning in the organisations concerned. (3) Lack of Accurate Information: The first basic limitation of strategic planning is the lack of accurate information and facts relating to future. Planning concerns future activity and its quality will be determined by the quality of forecast of future events. As no manager can predict completely and accurately the events of future, the planning may pose problems in operation. This problem is further, increased by lack of formulating accurate premises. Many times, managers may not be aware about the various conditions within which they have to formulate their planning activities. (4) Inflexibilities: Manager while going through the strategic planning process have to work in a set of given variables. These variables may be more in terms of organisational or external. These often provide considerably less flexibility in planning action. (5) Time and Cost: While going through the strategic planning process managers should also take into account both time and cost factors. The various steps of planning may go as

far as possible because there is no limit of precision in planning tools. But planning suffers because of time and cost factors. Time is a limiting factor for every manager in the organisation on, and if they are busy in preparing elaborate reports and instructions beyond certain level, they are risking their effectiveness. Excessive time spent on securing information and trying to fit all of it into a compact plans is dysfunctional in the organisation. (6) Rigidity: Often people feel that planning provides rigidity in managerial action. Many types of internal inflexibilities, may be results of planning itself. The planning stifles employee initiative and forces managers into rigid or straitjacket mode of executing their work. In fact, rigidity may make managerial work more difficult than it need be. This may result in it delay in work performance, lack of initiative, and lack of adjustment with changing environment. Many people feel that planning is limited in value because best results can be obtained by a muddling through types of operation in which each situation is tackled when and if it appears pertinent to the immediate problem. Though this factor of rigidity of planning is limiting factor but without planning, it is really difficult to operate particularly in large organisations. The planning also involves cost on the part of the organisation. The various factors analysed above contribute to the limitations of strategic planning, either making planning ineffective or making lesser degree of planned work.

Difference Between Planning and Strategy The most simple difference between strategy and planning Put very simply, imagine a box on the floor that represents your organisation:

Strategy is choosing where to put the box, its size and even whether it is

even a box.

Planning is working inside the box, deciding what to do about the choices

that were made. Of course you still need action, executing those choices. Another way of looking at it is

Strategy is about understanding your environment and making choices

about what you will do. Think, if you like, of where and how to play.

Planning is about making choices about how to use the resources you have

and the actions you will take to achieve the choices made inside your

strategy.

Planning is “Thinking before the action takes place”. It decides beforehand, what, when, how the task is to be accomplished. It is not exactly same as strategy, which is nothing but “a comprehensive plan.” The strategy is all about using a trick to gain success in a particular purpose. It is the skill of managing affairs of the enterprise.

BASIS FOR COMPARISON

PLANNING STRATEGY

Meaning Planning is thinking in advance, for the actions which are going to take place in the future.

Best plan opted for achieving the desired outcome.

What is it? Planning is a road map for accomplishing any task.

Strategy is the path chosen for achieving the objectives.

Related to Thinking Action

Basis Assumptions Practical considerations

Term Depending upon the circumstances.

Long Term

Nature Preventive Competitive

Part of Management Functions

Yes Sub-part of Decision Making

BASIS FOR COMPARISON

PLANNING STRATEGY

Sequence Second First

LEVELS OF STRATEGY

The Three Levels

The Three Levels of Strategy, developed by Gerry Johnson and Kevan Scholes along with other major managerial thinkers, are a way of defining the different layers of strategy which, in tandem, orient the direction of the organisation and define its success.

The Three Levels are:

1. Corporate 2. Business 3. Functional

When synchronised and coordinated, successful strategies at each of these levels will contribute to successful overall organisational strategy.

Corporate

This is the top layer of strategic planning, and is often associated with the organisation's mission and values, though it is developed in much more significant depth. Corporate strategy is defined by those at the very top of the organisation - managing directors and executive boards - and is an outline of the overall direction and course of the business. In effect, it defines:

General, overall strategy and direction Which markets the organisation will operate in How the markets will be entered and the general activities of the

organisation

Strategy is generally defined at key points in an organisation's lifetime. The most important time for this to occur is at the organisation's inception; however, it is often neglected in favour of a reliance on a specific service or product.

Corporate strategy is crucial as it will define all other decisions that are made within the organisation along the line.

Smaller, newer organisations which are targeting a very specific niche market, or operate with a small set of unique products/services, will find it far easier to develop a corporate strategy as there are fewer variables to consider.

However, larger and more developed organisations will find the process much simpler, as they may need to diverge from activities and behaviours which define who they are in order to reach out into new markets and to take new opportunities.

Business

Business strategy generally emerges and evolves from the overarching corporate strategy which has been set by those at the helm. They are usually far more specific than corporate strategy and will likely be unique to different departments or subdivisions within the broader organisation.

In general, they use corporate strategy as an outline to:

Define specific tactics and strategies for each market the organisation is involved in

Define how each business unit will deliver the planned tactics

Due to their nature, they are more common in larger firms that engage in multiple activities, than they are in small businesses. However, they can still be engaged in by smaller organisations who wish to define how they go about each different subsection of their operations, by breaking down the overall scope of the corporate strategy.

Functional

This (also known as Market-Level Strategy) refers to the day-to-day operation of the company, which will keep it functioning and moving in the correct direction. Whilst many organisations fail because they do not have an overarching corporate strategy, others fail because they have not developed plans for how to engage in everyday activities. Even with an overall direction you wish to head in, without a plan for how to successfully operate, an organisation will be unable to progress. These will be numerous and will define very specific aspects and operations within smaller departments, teams, groups and activities.

Overall, they define:

Day-to-day actions which are required to deliver corporate and business strategies

Relationships needed between units, departments and teams How operational goals will be met, and how they will be monitored

It is at this level, the lowest in strategic development, that leaders should define how different departments and functions will work together to achieve higher goals. There will be managers that will oversee departments (e.g. manufacturing and HR) that do not perform the same functions, but need to be synchronised in order to achieve the goals set out by the corporate and business strategies.

Though corporate strategy will get all of the attention, it is success at the bottom of the hierarchy - through day-to-day functions - which will truly define where the organisation as a whole will succeed. You need to build from the ground up, in small steps, in order to keep moving forward. If operations break down, so does the organisation.

Types of Business Level Strategies

Everything you need to know about the types of business level strategies. A strategy is a pattern or a plan which integrates an organisation’s major policies, goals and actions, sequences in a coherent linear of decision. It is not a simple one, strategy have a number of implications. It can be described as – i. A plan, or a similar idea that is direction, guide, course of action, ii. A perspective on an organisation’s fundamental way of doing things, iii. A pattern that provides for consistent behaviour over time and iv. A play or a specific “maneuver” intended to defeat a competitor. we will discuss about the different types of business level strategies. They are:- 1. Cost Leadership 2. Porter’s Generic Strategies 3. Differentiation Strategy 4. Focus and Niche Strategies 5. Tactical Strategies.

Types of Business Level Strategies: Cost Leadership, Porter’s Generic, Differentiation, Focus, Niche and Tactical Strategies Types of Business Level Strategies – Top 3 Types: Cost Leadership, Differentiation, Focus and Niche Strategies A strategy is a pattern or a plan which integrates an organisation’s major policies, goals and actions, sequences in a coherent linear of decision. It is not a simple one, strategy have a number of implications.

Type # 1. Cost Leadership: Cost Leadership is a situation in which market leader sets the price of a product or service, and competitors feel compelled to match that price. Cost Leadership is perhaps the clearest of the three generic strategies. In it, a firm set out to become the low-cost producer in its industry. The firm has a broad scope and serves many industry segments, and may even operate in related industries, the firm’s breadth is often important to its cost advantage. The sources of cost advantages are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials, and other factors. A low-cost product must find and exploit all sources of cost advantage. Low-cost producers typically sell a ‘standard’ or ‘no frills’ product and place considerable emphasis on reaping scale or absolute cost advantages from all sources. If a firm can achieve and sustain cost leadership, then it will be an above average performer in its industry provided it can command prices at or near the industry average. At equivalent or lower prices than its rivals, a cost leader’s low-cost position translates into higher returns. A cost leader, however, cannot ignore the bases of differentiation. If its product is not perceived as comparable or acceptable by buyers, a cost leader will be forced to discount prices well below competitors, to gain sales. This may nullify the benefits of its favourable cost position. A cost leader must achieve parity or proximity in the bases of differentiation relative to its competitors to be an above-average performer, even though it relies on cost leadership for its competitive advantage. Parity in the bases of differentiation allows a cost leader to translate its cost advantage directly into higher profits than competitors. Proximity in differentiation means that the price discount necessary to achieve an acceptable market share does not offset a cost leader’s cost advantage and hence the cost leader earns above-average returns.

The strategic logic of cost leadership usually requires that a firm be the cost leader, not one of several firms vying for this position. Many firms have made serious strategic errors by failing to recognize this. When there is more than one aspiring cost leader, rivalry among them is usually fierce because every point of market share is viewed as crucial.

Unless one firm can gain a cost lead and “persuade” others to abandon their strategies, the consequences for profitability (and long-run industry structure) can be disastrous, as has been the case in a number of petrochemical industries. Thus, cost leadership is a strategy particularly dependent on preemption, unless major technological change allows a firm to radically change its cost position. A firm pursuing a cost leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. This policy once achieved provides high margins and a superior’s return on investments. The skills and resources required to be successful in this strategy are sustained capital investment and access to capital; superior process engineering skills; good supervision and motivation of its labour force; product designed for ease in manufacturing; low-cost distribution system. This strategy requires tight cost control. This is often done by using a full costing method or activity based costing with frequent and detailed control reports the structure of the organization should be clear-cut and responsibilities clearly lay out. Organizations often provide incentives based on meeting strict quantitative targets, etc. In order to remain a cost leader, the firm attempts to avoid those factors that can cause the economies of scale to be affected. It has to work within the physical limits to efficient size, workers motivation, and focus on markets and suppliers, sometimes, in restricted geographical areas.

The low-cost producer strategy works best when buyers are large and have significant bargaining power; price competition among rival sellers is a dominant competitive force; the industry’s product is a standard item readily available from a variety of sellers; there are not many ways to achieve product differentiation that have value to the buyer; buyers incur low switching costs in changing from one seller to another and are prone to shop for the best price. A low-cost leader is in the strongest position to set the floor on market price and this strategy provides attractive defenses against competitive forces. Its cost position gives it a defense from competitors because its lower costs mean that it can still earn returns after its competitors have competed away their profits through rivalry. It is protected from powerful buyers because buyers can exert power only to lower prices, and this will be possible only with next most efficient competitor.

Lower cost provides protection against suppliers because there is more flexibility in the organization to cope with input cost increases. Any new entrant will find it difficult to overcome entry barriers because of required economies of scale, and also because the activities taken to achieve low costs are both rare and costly to imitate. Type # 2. Differentiation: The second generic strategy is Differentiation. In a Differentiation Strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. It is rewarded for its uniqueness with a premium price.

The means for Differentiation are peculiar to reach industry. Differentiation can be based on the product itself, the delivery system by which it is sold, the marketing approach, and a broad range of other factors. In construction equipment, for example, Caterpillar Tractor’s Differentiation is based on product durability, service, spare parts availability, and an excellent dealer network. In cosmetics, Differentiation tends to be based more on product image and the positioning of counters in the stores. 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. A Differentiator, therefore, must always seek ways of differentiating that lead to price premium greater than the cost of differentiating. A differentiator cannot ignore its cost position, because its premium prices will be nullified by a markedly inferior cost position. A differentiator, thus, aims at cost parity or proximity relative to its competitors, by reducing cost in all areas that do not affect differentiation. The logic of the Differentiation Strategy requires that a firm choose attributes in which to differentiate itself that are different from its rivals. A firm must truly be unique at something or be perceived as unique if it is to expect a premium price. In contrast to cost leadership, however, there can be more than one successful differentiation strategy in an industry if there are a number of attributes that are widely valued by buyers. In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to

meet those needs. Differentiation will cause buyers to prefer the company’s product/service over the brands of rivals. An organization pursuing such a strategy can expect higher revenues/margins and enhanced economic performance. The challenge in finding ways to differentiate that creates value for buyers and that are not easily copied or matched by rivals. Anything a company can do to create value for buyers represents a potential basis for differentiation.

Successful differentiation creates lines of defence against the five competitive forces. It provides insulation against competitive rivalry because of brand loyalty of customers and hence lower sensitivity to price. The customer loyalty also provides a disincentive for new entrants who will have to overcome the uniqueness of the product or service. Differentiation strategy works best when there are many ways to differentiate the product/service and these differences are perceived by buyers to have value or when buyer needs and uses of the item are diverse. The strategy is more effective when not many rivals are following a similar type of differentiation approach. There are risks in this strategy when the cost of differentiation becomes too great or when buyers become more sophisticated and need for differentiation falls. Type # 3. Focus and Niche Strategies: The third generic strategy is focus. This strategy is quite different from the others because it rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment of group of segments in the industry and tailors its strategy to serving them to the exclusion of others. By optimizing this strategy for the target segments, the focuser seeks to achieve a competitive advantage in its target segments even though it does not possess a competitive advantage overall. The focus strategy has two variants, in cost focus, a firm seeks a cost advantage in its target segment, while in differentiation focus, and a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser’s target segments and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments.

A focuser takes advantage of sub-optimization in either direction by broadly-targeted competitors. Competitors may be underperforming in meeting the needs of a particular segment, which opens the possibility for differentiation focus. Broadly-targeted competitors may also be over performing in meeting the needs of a segment, which means that they are bearing higher than necessary cost in serving it. An opportunity for cost focus may be present in just meeting the needs of such a segment and no more. A generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry, or buys groups or a geographical market and tailors its strategy to serving them to the exclusion of others. The attention of the organization concentrated on a narrow section of the total market with an objective to do a better job serving buyers in the target market niche than the rivals. Each functional policy of the organization is built with this mind.

Focus strategy is successful if the organization can choose a market niche where buyers have distinctive preferences, special requirements, or unique needs and they developing a unique ability to serve the needs of the target buyer segments. Even though the focus strategy does not achieve low cost or differentiation from the perspective of the market as a whole, it does achieve this in its narrow target. However, the market segment has to be big enough to be profitable and it has growth potential. The organization has to identify a buyer group or segment of a product line that demands unique product attributes. Alternatively, it has to identify a geographical region where it can make such offerings. Focusing organizations develop the skills and resources to serve the market effectively. They defend themselves against challengers via the customer goodwill they have built up and their superior ability to serve buyers in the market. The competitive power of a focus strategy is greatest when the industry has fast-growing segments that are big enough to be profitable but small enough to be of secondary interest to large competitors and no other rivals are concentrating on the segment. Their position is strengthened as the buyers in the segment require specialized expertise or customized product attributes. A focuser’s specialized ability to serve the target market niche builds a defence against competitive forces. Its focus means that either organization has a low cost option as its strategic target, high differentiation, or both. The logic that has been laid out earlier for cost leadership and differentiation also is applicable here.

Types of Business Level Strategy – 3 Main Types: Cost Leadership, Differentiation and Focus Strategies 1. Cost Leadership Strategy: A firm can achieve a cost leadership (low cost) position only when it is able to produce, provide goods or services at lower unit cost than their rivals. Here one should keep in mind that low cost does not mean that absolute lowest possible cost, it is just lower than rivals. In the process of adopting this strategy, managers should not exclude the features and services that are essential from buyers point. Managers need to identify the sources of cost advantage, which vary from one industry structure to another industry structure. There are nine major ways to achieve a cost advantage in performing value chain activities. They are: i. Economies of Scale – This benefit arise when an organisation achieves larger volumes that spread out some costs like advertising, R&D over large volumes. ii. Learning Curve Effects – The benefits of learning curve arises from experience of firm personnel in activities like plant layout, product design, mastering new technology and so on. It is better to remember a proverb “practice makes a man perfect”. iii. Cost of Key Resource Inputs – The prime resource input for manufacturing product is raw material and the second one is labour. Managers pool right quality raw materials at reasonable prices, and try to use labour (particularly not unionized), to increase productivity and reduce per unit production cost. iv. Link the cost with other Activities in the Company – Generally cost of one activity is affected by other activities performed; cost can be reduced with cooperation between and among activities. For example activities of supplier may be liked with a company’s inventory cost and reduce delivery time and inventory ordering and carrying cost. v. Sharing Resources with other Business Units – Resources like order passing, customer billing, warehouse, distribution channel, marketing personnel and technical support may be shared thereby reduce per unit cost of used resources. vi. Outsourcing – Outsourcing or hiring outside specialists to perform certain activities and functions helps reduce cost. Outsiders perform some selected activities with specialised skills and of cheaper than the company can perform those in the organisation. vii. First Mover Advantage – Generally a firm that moves first would be able to sell huge quantity of goods, and build brand name, which leads to reduction in cost.

viii. Higher Capacity Utilisation – Fixed cost per unit comes down with high utilisation of fixed assets. ix. Ascertainment of Managerial Decisions – A firm’s cost can be reduced by taking some strategic decisions like minimising customer services, restructuring and the like. 2. Differentiation Strategy: In a differentiation strategy, firm seeks to create a product or service that is perceived industry wide as unique and value by customers. Differentiation can take many forms. i. Multiple features (Microsoft windows vista) ii. Superior service (FedEx) iii. Spare parts availability (Caterpillar earth moving equipment) iv. Engineering design and performance (Mercedes, BMW) v. Product reliability (Johnson & Johnson baby products) vi. One stop shopping (Amazon.com) vii. Technological leadership (3M’s bonding and coating products) viii. Radar network (Lexus Automobiles) ix. Innovation (Nokia Cellular phones) Which of these is a preferred choice to achieve differentiation? Answer is obvious. The course, which is less expensive and is difficult to be copied by rivals. 3. Focus Strategy: Where an organisation can offer neither a cost leadership nor a differentiation strategy, a focus strategy could be more suitable. Focus strategy is also known as niche strategy. A firm that adapts this strategy selects a segment and tailors its strategy to serve them. A segment may be defined by geographic uniqueness, or by special product attributes. For example, Google (a specialist in Internet search engine software), eBay (online auctions). In this strategy, a firm focuses its effort and resources on a narrow, defined segment of market. Therefore, competitive advantage can be achieved only in the company’s target. The essence of a focus strategy is the exploitation of a particular market segment that is different from the rest of the industry.

Porter's Five Forces

Definition Porter’s five forces model is an analysis tool that uses five industry forces to determine the intensity of competition in an industry and its profitability level Five forces model was created by M. Porter in 1979 to understand how five key competitive forces are affecting an industry. The five forces identified are:

These forces determine an industry structure and the level of competition in that industry. The stronger competitive forces in the industry are the less profitable it is. An industry with low barriers to enter, having few buyers and suppliers but many substitute products and competitors will be seen as very competitive and thus, not so attractive due to its low profitability.

It is every strategist’s job to evaluate company’s competitive position in the industry and to identify what strengths or weakness can be exploited to strengthen that position. The tool is very useful in formulating firm’s strategy as it reveals how powerful each of the five key forces is in a particular industry. Threat of new entrants. This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants. Threat of new entrants is high when:

Low amount of capital is required to enter a market; Existing companies can do little to retaliate; Existing firms do not possess patents, trademarks or do not have

established brand reputation; There is no government regulation; Customer switching costs are low (it doesn’t cost a lot of money for a firm

to switch to other industries); There is low customer loyalty; Products are nearly identical; Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects

the buying firms’ profits because it has to pay more for materials. Suppliers have strong bargaining power when:

There are few suppliers but many buyers; Suppliers are large and threaten to forward integrate; Few substitute raw materials exist; Suppliers hold scarce resources; Cost of switching raw materials is especially high.

Bargaining power of buyers. Buyers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when: Buying in large quantities or control many access points to the final customer; Only few buyers exist;

Switching costs to other supplier are low; They threaten to backward integrate; There are many substitutes; Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle. Rivalry among existing competitors. This force is the major determinant on how competitive and profitable an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when:

There are many competitors; Exit barriers are high; Industry of growth is slow or negative; Products are not differentiated and can be easily substituted; Competitors are of equal size; Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry, scholars have suggested including the sixth force: complements. Complements increase the demand of the primary product with which they are used, thus, increasing firm’s and industry’s profit potential. For example, iTunes was created to

complement iPod and added value for both products. As a result, both iTunes and iPod sales increased, increasing Apple’s profits. Using the tool We now understand that Porter’s five forces framework is used to analyze industry’s competitive forces and to shape organization’s strategy according to the results of the analysis. But how to use this tool? We have identified the following steps: Step 1. Gather the information on each of the five forces Step 2. Analyze the results and display them on a diagram Step 3. Formulate strategies based on the conclusions Step 1. Gather the information on each of the five forces. What managers should do during this step is to gather information about their industry and to check it against each of the factors (such as “number of competitors in the industry”) influencing the force. We have already identified the most important factors in the table below.

Porter's Five Forces Factors

Threat of new entry

Amount of capital required Retaliation by existing companies Legal barriers (patents, copyrights, etc.) Brand reputation Product differentiation Access to suppliers and distributors Economies of scale Sunk costs Government regulation

Supplier power

Number of suppliers Suppliers’ size Ability to find substitute materials Materials scarcity Cost of switching to alternative materials Threat of integrating forward

Buyer power

Number of buyers Size of buyers Size of each order Buyers’ cost of switching suppliers There are many substitutes Price sensitivity Threat of integrating backward

Threat of substitutes

Number of substitutes Performance of substitutes Cost of changing

Rivalry among existing competitors

Number of competitors Cost of leaving an industry Industry growth rate and size Product differentiation Competitors’ size Customer loyalty Threat of horizontal integration Level of advertising expense

Step 2. Analyze the results and display them on a diagram. After gathering all the information, you should analyze it and determine how each force is affecting an industry. For example, if there are many companies of equal size operating in the slow growth industry, it means that rivalry between existing companies is strong. Remember that five forces affect different industries differently so don’t use the same results of analysis for even similar industries! Step 3. Formulate strategies based on the conclusions. At this stage, managers should formulate firm’s strategies using the results of the analysis For example, if it is hard to achieve economies of scale in the market, the company should pursue cost leadership strategy. Product development strategy should be used if the current market growth is slow and the market is saturated.

Although, Porter’s five forces is a great tool to analyze industry’s structure and use the results to formulate firm’s strategy, it has its limitations and requires further analysis to be done, such as SWOT, PEST or Value Chain analysis. Example This is Porter’s five forces analysis example for an automotive industry.

Porter's Five Forces Evaluation

Threat of new entry (very weak)

Large amount of capital required High retaliation possible from existing companies, if new entrants would bring innovative products and ideas to the industry Few legal barriers protect existing companies from new entrants All automotive companies have established brand image and reputation Products are mainly differentiated by design and engineering quality New entrant could easily access suppliers and distributors A firm has to produce at least 5 million (by some estimations) vehicles to be cost competitive, therefore it is very hard to achieve economies of scale Governments often protect their home markets by introducing high import taxes

Supplier power (weak)

Large number of suppliers Some suppliers are large but the most of them are pretty small Companies use another type of material (use one metal instead of another) but only to some extent (plastic instead of metal) Materials widely accessible Suppliers do not pose any threat of forward integration

Buyer power (strong)

There are many buyers Most of the buyers are individuals that buy one car, but corporates or governments usually buy large fleets and can bargain for lower prices It doesn’t cost much for buyers to switch to another brand of vehicle or to start using other type of transportation Buyers can easily choose alternative car brand Buyers are price sensitive and their decision is often based on how much does a vehicle cost Buyers do not threaten backward integration

Threat of substitutes (weak)

There are many alternative types of transportation, such as bicycles, motorcycles, trains, buses or planes Substitutes can rarely offer the same convenience Alternative types of transportation almost always cost less and sometimes are more environment friendly

Competitive rivalry (very strong)

Moderate number of competitors If a firm would decide to leave an industry it would incur huge losses, so most of the time it either bankrupts or stays in automotive industry for the lifetime Industry is very large but matured Size of competing firm’s vary but they usually compete for different consumer segments Customers are loyal to their brands

There is moderate threat of being acquired by a competitor

Sources Porter, M.E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review. Available at: http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/

Examples of SWOT analysis: i. Wal-Mart: a. Strengths – Wal-Mart is a powerful retail brand. It has a reputation for value for money, convenience and a wide range of products all in one store. b. Weaknesses – Wal-Mart is the World’s largest grocery retailer and control of its empire, despite its IT advantages, could leave it weak in some areas due to the huge span of control. c. Opportunities – To take over, merge with, or form strategic alliances with other global retailers, focusing on specific markets such as – Europe or the Greater China Region. d. Threats – Being number one means that you are the target of competition, locally and globally. ii. Starbucks: a. Strengths – Starbucks Corporation is a very profitable organisation, earning in excess of $600 million in 2004. b. Weaknesses – Starbucks has a reputation for new product development and creativity. c. Opportunities – New products and services that can be retailed in their cafes, such as – Fair Trade products. d. Threats – Starbucks are exposed to rises in the cost of coffee and dairy products. iii. Nike: a. Strengths – Nike is a very competitive organisation. Phil Knight (Founder and CEO) is often quoted as saying that ‘Business is war without bullets.’ b. Weaknesses – The organisation does have a diversified range of sports products. c. Opportunities – Product development offers Nike many opportunities. d. Threats – Nike is exposed to the international nature of trade. iv. Indian Premier League: Where will you find the Mumbai Indians, the Royal Challengers, the Deccan Chargers, the Chennai Super Kings, the Delhi Daredevils, the Kings XI Punjab, the Kolkata Knight Riders and the Rajasthan Royals? In the Indian Premier League (IPL) – the most exciting sports franchise that the World has seen in recent years, with seemingly endless marketing opportunities. (Only strengths and opportunities)