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Strama Chapter 7 8

Strategic management
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133 views12 pages

Strama Chapter 7 8

Strategic management
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lesson 7: Environmental Scanning covers social, political, cultural, legal, economic, technological,

and geopolitical considerations knowing that the globalized conduct


1.1 The Tasks to be Done of the business and the major role played by computers and the
Internet are matters that should be considered too.
The enormity of the tasks to be done in developing the strategic plan
necessitates a separate discussion of each of the six tasks of strategic Environmental scanning covers a broader context as it involves
management based on the hybrid model as espoused by the author. evaluating, monitoring, and dissemination of information from the
external and internal environments to key people within the
Guided by a variety of strategic management models described
corporation (Wheelen and Hunger 2004). Its purpose is to identify
earlier, what should follow through is a series and parallel activities
strategic factors: those external and internal elements that will
that need to be undertaken to provide substance and meaning to the
determine the future of the corporation.
vision and mission statement espoused by the founder or top
management of the firm. The entire personnel complement of the 8.3 The Macro Environment
business organization need to be involved in developing specific
tasks and activities to concretize the intents and purposes of the The macro environment essentially refers to all forms of direct or
strategic plan. indirect factors of overall environmental conditions at large
considered external or outside the business organization. The overall
A critical aspect in considering strategic management agenda lies in environment of the company is actually the world where it operates.
going to a process of developing the strategic plan which should Diagrammatically, the macro environment takes the form of a
involve parties in the employ of the business firm. Going through diagram shown in Figure 59.
the process of developing the strategic plan is a choice or
consideration for a model that will serve as a guide. The question of As shown in Figure 59, the macro environment of the business
how good or bad the strategic plan is depends largely on which of organization covers the economy at large; the technologies that have
the models was used as a guide and whether the process or series of bearing upon the business system; the government system with its
activities in the strategic management tasks were followed and how regulatory and legislative powers; the demography of the economy
comprehensive are the contents of the component tasks forming part particularly the segment or sector considered as market of the firm;
of the model. the societal and cultural lifestyles of the population which have
bearing on the business and other sectors within the economy
The author believes that meaningful and effective strategic belonging to the stakeholder group.
management plans should be done premised or anchored on doing a
series of tasks as follows: In a more detailed presentation, Wheelen and Hunger (2004) present
a concentric diagram in doing environmental scanning in macro and
a. Task 1- Environmental scanning micro context as shown in Figure 60. As shown in Figure 60, the
b. Task 2 Setting vision and mission statement business organization is part of a large environment with active
c. Task 3 Setting strategic objectives forces is the area of sociocultural, economic, politico-legal and
d. Task 4 Crafting strategies technological developments. Within the broader context of the so-
e. Task 5 Implementing/Executing strategies called societal environment is the task environment with direct
f. Task 6 Performance evaluation and revisions bearing on the conduct of the business.
Other than the abovementioned tasks, an extremely important aspect In a more detailed presentation, Wheelen and Hunger (2004)
to be done both by the Board of Directors and the top management identified specific variables that need to be addressed in societal
team or senior operating officers of the firm is to take active role in environment analysis as shown in Table 3 and Table 4. The variables
developing the strategy and be overly concerned with continuously shown in Table 3 identified some important variables in societal
monitoring the progress in implementing/executing the strategic environment that are relevant to single business concern with
plan. The abovementioned considerations are the basis for the domestic operations, hence, extremely important for doing business
strategic management model shown in Figure 56 which is also the level strategy. On the other hand, the variables referred to in Table 4
contextual reference in going through all the discussions articulated identified some important variables in international societal
in this book. environment, hence, relevant for large organizations and useful for
developing corporate strategies.
8.2 The Nature of Environmental Scanning
Taken together, the parameters set forth in Table 3 and Table 4 serve
In the context of strategizing for the purpose of making the business
as inputs to societal analysis exercise or flow profounded by
organization competitive and sustainable over a long-term period,
Wheelen and Hunger (2004) as shown in Figure 61. As shown in
environmental scanning is extremely important and one that should
Figure 61, environmental scanning translates to a societal analysis
be seriously taken into account in the course of developing the
through a process and approach leading to selection of certain
strategic plan. Environmental scanning is critical in the sense that
strategic factors and eventually determining the kind and depth of
the business organization has to be responsive to the prevailing and
the strategic plan itself.
upcoming situations or scenarios. If the plan is not responsive to the
needs of the time and if it cannot adopt to the realities of the ever 8.4 The Economic Factors
changing world, the business or any organization for that matter is
doomed to failure or destined to close up. The environment is one The economic factors or forces referred to in Table 3 and Table 4
that business managers and strategists cannot change but something point to identifying quantitative parameters relevant to the firmin
that the business has to live with. business perspectives. The analysis of the macroenvironment
necessitates consideration of the key economic indicators that will
Environmental scanning is a process that takes into account both affect the business directly or indirectly. Examples of the key
external and internal environment as espoused by Wheelen and economic indicators that need to be considered in the analysis of the
Hunger (refer to Figure 52) as well as Rayport and Jaworski (refer macro environment are summarized by Wheelen and Hunger as
to Figure 54). It takes into consideration the macro and micro shown in Table 5.
environment in light of a variety of factors external to the firm or
those parameters outside the business organizations that will directly
and indirectly affect the conduct of the business. To name a few, it
8.5 SWOT Analysis

Though it appears as a very simple tool for analysis, SWOT analysis


has become a popular tool for doing qualitative analysis of the
potentials of business organizations particularly in the context of
assessing their competitiveness. SWOT stands for strengths,
weaknesses, opportunities, and threats. Thompson and Strickland
emphasized that for a company's strategy to be well-conceived, it
must be matched with the resource strengths and weaknesses as well
as the best market opportunities and external threats to its well-
being.

Table 3. Some Important Variables in Societal Environment

(Source: Adapted from Wheelen and Hunger (2004), p. 58 with


improvement)

In relation to strategic management, the strengths and weaknesses


component of the SWOT represents its internal environment
whereas the opportunities and threats component of the SWOT
represents its external environment. This simplistic view on the
concept of SWOT as it relates to strategic management is shown in
Figure 62.

A strength is something a firm does well or a characteristic that


enhances its competitiveness. It consists of the following:

a. valuable competencies or know-how;


b. valuable physical assets;
c. valuable human assets;
d. valuable organizational assets;
e. valuable intangible assets;
f. important competitive capabilities; and
g. an attribute that places a company in a position of market
advantage.

A weakness is something a firm lacks, does poorly, or a condition


placing it at a disadvantage. Weaknesses are deficiencies of the firm
which are considered competitive liabilities. Weaknesses of the
firm relate to the following:
Table 4. Some Important Variables in International Societal
Environment (Wheelen and Hunger 2004) a. deficiencies in know-how or expertise or competencies;
b. lack of important physical, organizational, or intangible
assets; and
c. missing capabilities in key areas.

Table 5. Relevance of Key Economic Features


Opportunities refer to situations where there are potentials from 8.8 The Micro Environment
developing into products or services or other business opportunities.
They are considered options by which the business organizations can The micro environment refers to the internal environment or the
explore or venture into to enhance its competitive advantage or environment within the business organization itself. While it may be
pursue the agenda of growth and expansion. relatively easy to conduct a macro or external environment just as it
is much easier to criticize others, doing an internal analysis or micro
Threats usually come in the form of internal and external factors analysis may be easier said than done. At the organizational and
that may put the firm in uncompromising situation. They come in individual level, it is often difficult to know or admit one's
the form of situations, scenarios or developments largely influenced weaknesses though it may be easy to know one's strengths and
by factors external to the firm either from its competitors or the sometimes overdo or brag about it. One useful guide to do this is to
economy and the society at large. If not noticed and nothing is made use organizational development tools like JOHARI window.
to preempt or avert the threats, they can have serious and devastating
impacts to the business both in the immediate and long-term future. Table 6. SWOT Analysis - What to Look for

The following are examples of situations which can pose as threats


to the business in general:

a. emergence of cheaper/better technologies;


b. introduction of better products by rivals;
c. intensifying competitive pressures;
d. onerous regulations;
e. rise in interest rates;

f. potential of a hostile takeover;


g. unfavorable demographic shifts;
h. adverse shifts in foreign exchange rates; and
i. political upheaval in a country.

8.6 What to Look for in the SWOT

As to what to look for in the course of doing SWOT analysis for the
firm, Table 6 is a helpful guide. As shown in Table 6, the for the fun
shows the potential resource strengths which may come in the form
of healthy financial condition, strong brand name/ reputation, cost
and price advantage, etc. Weaknesses on the other hand may prevail
or exist on account of having no clear direction, weak financial
condition, obsolete production system or technologies, etc. The third
and the fourth columns of Table 6 identified other conditions
determinant of the firm's opportunities and threats.

8.7 Relevance of SWOT in Strategic Management

Simple as it is, SWOT analysis comes as a handy tool for putting


forward a simplistic approach to strategizing or strategic planning in
particular. This view is explained by Pitts and Lei (2000 in a diagram
in Figure 63. As shown in Figure 63, all the factors or parameters
comprising the SWOT are relevant to strategy. The external
components of the SWOT come in the form of opportunities and Other than the direct involvement of all the parties in the
threats. Strategists must endeavor to search and discover for organization in the conduct of micro or internal analysis, it should
opportunities as window for strategizing. On the other hand, factors be of help to avail of the services of external parties, experts or
considered as threats for the firm should be averted to avoid consultants. Qualified third parties are in a position to reinforce the
converting itself into a weakness or something that would form part micro or internal analysis done by the members of the business
of the liabilities of the firm. organizations as aside from their expertise on the subject; external
parties or consultants are in a better position to conduct a no- holds-
barred assessment of the strengths and weaknesses of the
organizations. Being unbeholden to internal administrative policies The concept of competence or competency of a firm evolves around
and given the kind of task consultants are expected to do, third the company's asset or primary strength upon which the conduct of
parties or consultants in a proper position do an honest-to-goodness the business is anchored upon. It is something that drives or
internal analysis with a minimum bias. motivates business organization to pursue a business and capitalize
on it in pursuit of its business.
8.9 Assessment of Strengths and Weaknesses
While competency may be considered inborn or genetic to some
As discussed early on and as shown in Figure 63, the internal or individuals, competency of business organizations is viewed as the
micro components in the SWOT take the form of strengths and product of organizational experience and represents real proficiency
weaknesses from which strategic planners can draw motivation and in performing an internal activity. It is something developed or
inspiration. For purposes of strategizing, of foremost and immediate nurtured as the business commences and eventually progresses in the
importance to the business organizations are their strengths. Known conduct of its business. It is a result of process and learning exercise
and proven strengths of the firm can be capitalized, applied or driven by its own experience and desire to excel in the running of its
sustained to maintain or enhance the competitive advantage of the business.
firm. Strengths can be deduced by examining the potential source of
strengths as listed down in the first column of Table 6. As may be Within the broad context of competency is a subset or specific
noted in the previous and upcoming discussions in the subsequent category known as core competence. Core competency refers to a
chapters, it is implied that corporate or business level strategies well-performed internal activity that is central (not peripheral or
which are translated to functional and operations strategies are incidental) to a company's competitiveness and profitability.
premised or anchored upon the strengths of the firm. Strengths of the
firm result to core and distinctive strategies which the firm can later Distinctive competency on the other hand is a competitively
transform into operational strategies. valuable activity that a company performs better than its rivals. It is
something unique to a company that makes it different from the rest
The weaknesses on the other hand have to be acknowledged but of the business organizations within its industry or sector that
efforts have to be made to overcome these weaknesses in the hope enables to outdo or outcompete its rivals.
that they can be transformed into assets or strengths sooner or later.
Through training and development for instance, weaknesses of 8.10.1 How competencies are acquired
personnel in the organization can be addressed and later considered
Competencies, may it be core or distinctive competencies, are
not a weakness but either an opportunity or strength. Through
incidental to a business organization. It stems from skills, expertise
research and product development, weaknesses can be minimized
and experience which is a result or outcome of the accumulation of
and chances are, these can result to other or new products considered
learning over time and gradual buildup of real proficiency in
as strengths or by doing so, weaknesses of the product or service are
performing an activity.
reduced to minimum that they are not considered insurmountable
weakness or threat to the organization. Having competency involves deliberate efforts to develop the ability
to do something resulting from doing any of the following activities:
Weaknesses being a high risk factor for the organization should be
handled with care and utmost confidentiality. Managers and a. selection of people with requisite knowledge and
concerned parties should see to it that organizational weaknesses expertise;
remain a closely guarded secret seeing to it that these are not made b. upgrading or expanding individual abilities;
known to the public or divulged to the competitors as they could c. molding work products of individuals into a cooperative
have damaging and devastating implications in the immediate and effort to create organizational ability; and
long-term plan. d. a conscious effort to create intellectual capital.
8.10 Organizational Competencies Often, a core competence results from collaboration among different
parts of an organization. Typically, core competencies reside in a
Every organization may it be a business organization, non-
company's people, not in assets on the balance sheet. A core
government organization, including government organizations exist
competence gives a company a potentially valuable competitive
for certain motives and intents or reasons for being in the business.
capability and represents a definite competitive asset.
In doing so, such organizations must have something in themselves
that these bodies will not engage in any kind of business without 8.10.2 Types of core competencies
having the necessary skills or capacity to do or undertake what it
seeks to undertake. In other words, the organization has something Core competency may come in a variety of ways that may be
in its shelves a competitive product or service that it can push developed along the way as the business accumulates experience and
forward. as it employs creative, innovative and experienced employees in its
fold. It may come in broad aspects widely known to the public or
Forming part of the major asset considered to be internal to the unknown to the public at large but very well-known to its target
business is organizational competency. This is in fact one of the market. The following are examples of the types of core
reasons why investors engage in business simply because they have competencies:
it which can be capitalized as a competitive advantage It may be
somehow difficult to compete with the old guards of the industry but a. expertise in building networks and systems to enable e-
given the competency that they have plus more of it that they will Commerce;
develop along the way, the new entrants hopefully become b. speeding new/next-generation products to market;
competitive in due time. c. better after-sale service capability;
d. skills in manufacturing a high quality product;
The abovementioned discussions are presumptions that business e. innovativeness in developing popular product features;
organizations must have something or competencies to speak of to f. speed/agility in responding to new market trends;
be able to do business in a competitive manner. The existence of g. system to fill customer orders accurately and swiftly; and
competencies in the organization speaks of the organization's h. expertise in integrating multiple technologies to create
capacities in terms of tangible and intangible assets from which it families of new products.
derives its motivation and strength to conduct business.
8.11 The BCG Matrix

BCG stands for the Boston Consulting Group which developed the
so-called BCG matrix. BCG matrix falls within the purview of
internal and micro environment analysis in the sense that doing the
matrix allows an internal assessment of the products or services
offered by the firm. Knowing and having a BCG matrix for the firm
is basic to business managers in particular the marketing manager.
The BCG matrix gives the members of the business organization an
idea which among its products or services have a relative advantage
or a certain level of competitiveness vis-a-vis its rival firms.

A BCG matrix is a four-quadrant diagram showing categorization


of products or services handled by the firm. BCG matrix is a basic
tool for knowing which of the products or services offered by the
firm is worth pushing now (or later) and which among them to spend
much of the resources of the firm. The categorization of products 8.12 Company Competitive Index
and services will be of great help in doing the SWOT analysis and
eventually makes strategizing not so difficult. An example of a BCG For purposes of doing environment analysis in relation to the
matrix is that of the Bank of the Philippine Islands as shown in competitiveness of the firm, doing a comparative competitive test
Figure 64. will be also useful. Using a company competitive index, strategists
will have an idea as to how competitive is the firm vis- a-vis its
In developing the BCG matrix, it is important to do an honest- to- competitors on a per product or service basis.
goodness internal analysis before categorizing the products and
services then placing them in any of the four quadrants in the BCG Company competitive index addresses the individual
matrix. Guided by the track record of the products or services in competitiveness of each of the players within the industry. By doing
terms of sales and contribution to the image of the firm, it should be the company competitive index, a business concern is fitted with
easy to develop the BCG matrix. The matrix classifies the company's another business organization offering similar products/firms or one
products or services into four categories briefly described as follows. it feels threatened with. Computation of the company competitive
index is done by way of listing down a set of parameters or criteria
a) Question marks. Sometimes called "problem children" common to the business organizations under consideration (refer to
or "wild cats," question marks are new products with the Table 7). Taking into account the industry as a whole or the subgroup
potential for success, but they need a lot of cash for whose business players are included in the index computation, a
development. If such a product is to gain enough market weight is given to each of the common parameters or criteria.
share to become a market leader and thus a star, money
must be taken from more mature products and spent on The details of the computational procedure in arriving at the
question marks. company competitive index are shown on the lower portion of
b) Stars. The products/services in this category are market Table 7. The computation and tabulation exemplified by Table 7
leaders typically at the peak of their product life cycle. results to a company competitive index of each of the firms under
They are usually capable of generating enough cash to consideration which in effect determines the ranking of the level of
maintain their high share of the market. When their market competitiveness of the firms within the industry or subsector. This
rate slows, stars become cash cows. parameter is an excellent tool for developing business level strategy
c) Cash cows. They include products or services that particularly in measuring the results or outcomes out of the
typically bring in far more money than is needed to implementation of either a corporate or business level strategy.
maintain their market share. In the declining stage of their
Lesson 8: Competitive Strategies
life cycle, these products are "milked" for cash that will be
invested in new question marks. 15.1 The Concept of Competitive Strategy
d) Dogs. This category of products has low market share and
does not have the potential (because they are in an Motivated and driven by its vision-mission statement and
unattractive industry) to bring in cash. Question marks organizational competencies as well as pressures of market
unable to obtain a dominant market share (and thus competition, business organizations need to develop their own
become stars) by the time the industry growth rate competitive strategy to pursue their profit objectives. It is around
inevitably slows become dogs. According to BCG growth developing or building a competitive strategy that business
share matrix, dogs should be sold off or managed carefully organizations can look forward to a long-term and sustainable
for the small amount of cash they can generate. existence throughout their corporate existence and even beyond.
Because strategy development is built around the notion that there
Doing the BCG matrix is quite simple and straightforward as shown are conditions adverse to the company, it is therefore, not just a
in Figure 64. As shown in Figure 64, a four-quadrant diagram is matter of having a simple strategy or business plan but one that is
drawn and labeled as stars, question marks, cash cows and dogs. The strategic and one that is considered competitive enough to outdo the
market potentials of each of the products or services handled by the rivals.
firm are assessed and then indicated or listed in the appropriate
quadrant of the BCG matrix. Given the BCG matrix indicating Competitive strategies consist of specific efforts of the business
which product or service belongs to which quadrant will give the top organization meant to outwit or outcompete direct and indirect
management an idea which product or service will be pushed hard competitors in certain specific areas or directions. Competitive
or set aside for the time being. strategies focus on particular areas of concern the company believes
it has the advantage or edge to be able to outrace its competitors in
a particular context of doing business.

Competitive strategies usually come in qualitative statements and


market initiatives as well as business approaches to address a
particular focus. For instance, competitive advantage may come in d) focused differentiation strategy; and
any of the following qualitative statements: e) best-cost provider strategy.

a) attract and please customers; Diagrammatically, the boundaries of the five generic competitive
b) withstand competitive pressures; and strategies are shown in Figure 73.
c) strengthen market position.
15.5 Overall Low-cost Provider Strategy
15.2 Objectives of Competitive Strategies
As the term implies, the concept of overall low-cost provider
Competitive strategies may be proactive or reactive as they may be strategy evolves around the idea of providing products and services
either an offensive or defensive strategy. Proactive strategies come at low cost in all or as many aspects possible. Overall low-cost
in the form of offensive strategies and reactive strategies take the provider strategy means having low overall costs, not just low
form of defensive strategies. As an offensive or defensive strategy, manufacturing or production costs but in other costs as
competitive strategies are also meant to:

a) counter actions of key rivals;


b) shift resources to improve long-term market position;
c) respond to prevailing market conditions; and
d) pursue new areas of business concern.

Unlike corporate or business level strategy, competitive strategies


are generally narrower in scope or focused in their direction.
Competitive strategies come in narrow or focused direction or
concern in that they are usually perceived as:

a) generally addressed towards customer's need instead of


being product-centered;
b) usually task focus and associated with functional
strategies;
c) often marketing-oriented in nature; well thus resulting to relatively low market price and, hence,
d) meant to outdo specific competitor; and competitiveness on the part of the business firm. Low-cost strategy
e) could be short-term in nature. concerns with the ability of a company to design, produce, and
market a comparable product more efficiently than its competitors.
15.3 Concerns of Competitive Strategy
Overall low-cost provider strategy is generally used in a market
More than just supporting the corporate or business level strategy, whose income levels or purchasing power of the targeted market is
competitive strategy raises internal and external issues to outwit its low. The strategy is premised on the notion that price is the most
competitors. To name a few, the following questions are concerns in dominant indicator of product sales and this is particularly true for
addressing competitive strategy: consumer-based products among the poor and developing countries.
Given this notion, overall low-cost strategy is driven to produce a
a) Should the business compete on the basis of low cost (and product created and distributed at the lower cost possible.
thus price), or should it differentiate products or services
on some basis other than cost, such as quality or service? Low-cost products come with the perception that it is of low- cost
b) Should the business compete head-to-head with its quality though not in all aspects. It has to be qualified and
competitors for the biggest but most sought-after share of remembered that overall low-cost strategy does not necessarily mean
the market? Or should it focus on a niche in which we can producing a cheap product or delivering a low-priced service but it
satisfy a less sought-after but also profitable segment of may be of low price but on a comparative basis, the firm offers its
the market? low cost or relative market price advantage as its selling point.
c) Should the company focus on internal (domestic)
competitiveness or should it address external Companies desirous of pursuing a low-cost strategy must be
(international) opportunities? conscious of the following:

15.4 Generic Competitive Strategies a) cost conscious corporate culture;


b) employee participation in cost-control efforts;
Addressing competitive strategies is a matter of choice and priority c) ongoing efforts to benchmark costs;
of the top management. It may be biased or concerned with using or d) intensive scrutiny of budget requests; and
capitalizing on price, product, market or other aspects the business e) programs promoting continuous cost improvement.
feels capable of doing to make the business competitive.
15.5.1 Achieving overall low-cost strategy
Price-based strategy relies on market price of the product as the
selling point and product-based strategy talks about product To be capable of pursuing an overall low-cost strategy, all aspects of
content and quality as the driver of business competitiveness the supply and distribution chain or the whole value chain system
Market-based strategy on the other hand concerns with adopting should be examined to find opportunities for areas that may result to
the product (and the price as necessary) to a particular market area reduction or adjustments.
or sector the business seeks to penetrate.
In general, low-cost strategy can be achieved in a number of ways
In specific terms, and as commonly used in the industry, competitive among them by exercising the following options:
strategies come in various generic approaches as follows:
a) open up a sustainable cost advantage over rivals, using
a) overall low-cost provider strategy; lower-cost edge to either;
b) focused low-cost strategy; b) under-price rivals and reap market share gains; and
c) broad differentiation strategy; c) earn higher profit margin selling at going price.
Thompson and Strickland advocate the following generic approach b) product is standardized or readily available from many
to achieving a low-cost advantage: suppliers;
c) there are a few ways to achieve differentiation that have
a) Approach 1: Do a better job than rivals of performing value to buyers;
value chain activities efficiently and cost-effectively. d) most buyers use product in same ways;
b) Approach 2: Revamp value chain to bypass cost- e) buyers incur low switching costs;
producing activities that add little value from the buyer's f) buyers are large and have significant bargaining power;
perspective. and
g) industry newcomers use introductory low prices to attract
15.5.2 Keys to succeed in achieving low-cost leadership
buyers and build customer base.
Engaging in for overall low-cost strategy is not a hit-and- miss
15.5.5 Pitfalls of low-cost strategy
option but one that should be carefully studied in a detailed manner
taking into consideration the so-called bolt-and-nut analysis. There While it has some advantages worth capitalizing on, there are pitfalls
are proven strategies to address this strategy and Thompson and and disadvantages of a low-cost strategy and they are as follows:
Strickland (1999) have identified the following as the keys to
achieving low-cost leadership strategy: a) low cost methods are easily imitated by rivals;
b) becoming too fixated on reducing costs and ignoring buyer
a) make achievement of low-cost relative to rivals the theme interest in additional features;
of firm's business strategy; c) declining buyer sensitivity to price;
b) find ways to drive costs out of business year after year; d) changes in how the product is used; and
c) scrutinize each cost-creating activity, identifying cost e) technological breakthroughs open up cost reductions for
drivers; rivals.
d) use knowledge about cost drivers to manage costs of each
activity down year after year; 15.5.6 Revamping the value chain
e) find ways to reengineer how activities are performed and
coordinated-eliminate the costs of unnecessary work It is generally perceived that revamping the value chain is the basic
steps; and approach to addressing the cost of production and distribution of the
f) be creative in cutting low value-added activities out of product. Restructuring or revamping the value chain is one option
value chain system-reinvent the industry value chain. where the company can possibly reduce the cost of raw materials of
inputs as well as distribution costs leading to opting for low-cost
15.5.3 Controlling cost drivers strategy. This option can be achieved by doing the following:

Cost drivers are cost components or inputs to a product or services a) abandon traditional business methods and shift to e-
that constitute a large part or portion of the overall cost of producing Business technologies and use of the Internet;
a product or service. Any changes, downward or upward of that b) use direct-to-end-user sales/marketing methods;
particular cost component, will drive the cost and market price of the c) simplify product design;
finished product or service which has impacts on its competitiveness d) offer basic, no-frills product/service;
in the market. e) shift to a simpler, less capital-intensive, or more flexible
f) technological process; find ways to bypass use of high-
It is, therefore, extremely important to manage or control the cost of cost raw materials; f)
raw materials and other form of inputs to stay competitive. The g) relocate facilities closer to suppliers or customers;
following are strategies leading to controlling cost drivers: h) drop "something for everyone" approach and focus on a
limited product/service; and
a) capture scale economies; avoid scale diseconomies;
i) reengineer core business processes.
b) capture learning and experience curve effects;
c) manage costs of key resource inputs To consider initiating revamping or initiating changes in the value
d) consider linkages with other activities in value chain; chain system, it takes identifying specific areas of concern in the
e) find sharing opportunities with other business units; value chain itself and doing detailed financial analysis at that
f) compare vertical integration vs. outsourcing; particular level. Shown in Figure 74 is an example of a value chain
g) assess first-mover advantages vs. disadvantages; where competitive advantage based on low-cost leadership can be
h) control percentage of capacity utilization; developed.
i) make prudent strategic choices related to operations;
j) exercise frugality;
k) invest is cost-saving and efficient technologies or systems;
and
l) exercise tight budget control measures.

15.5.4 When does low-cost strategy work best?

In general, and under normal conditions, cost and market price of


the product are a dominant factor in terms of enhancing
competitiveness. In a market where income and purchasing power
are low (e.g., in developing countries), market price of a product is
the best competitive tool. In places where income level and
purchasing power are high, low cost of a product or low market price
is not everything what it takes to sell. Hence, there are certain
conditions where low-cost strategy is appropriate such as the
following scenarios:

a) price competition is vigorous;


15.6 Differentiation Strategy a) a powerful competitive approach when uniqueness can be
achieved in ways that -
Differentiation strategy is biased on the notion that the business i. buyers perceive as valuable and are willing to pay
exists because of the variety of market or consumers it serves. Given for
the fact that desires of customers vary in needs and wants as well as ii. rivals find hard to match or copy
luxuries including cravings for exotic products or services, business iii. can be incorporated at a cost well below the price
firms look forward to serving these needs by various sectors or premium that buyers will pay
segments by way of different kinds of products and brands. b) command a premium price
c) increase unit sales
Differentiation strategy either in products or services context
d) build brand loyalty
concerns with the process of creating a competitive advantage by
designing a variety of products and services to satisfy wants and 15.6.4 Examples of differentiation themes
needs of the customers. Having a diversity of products leads to range
of product or brand categories and depending on its market To pursue differentiation strategies usually means having marketing
potentials, it may even lead to forming or creating another business gimmicks or promotional activities with themes such as the
organization to handle such product or service. following:

Companies must differentiate their products to a certain degree in a) Lasang Pinoy - Jollibee
order to attract customers and satisfy some minimal level of need. b) More for your money - McDonald's, Wal-Mart
However, some companies differentiate their products to a much c) Prestige- Rolex
greater degree than others, and this difference can give them d) Technological leadership – SM Corporation, Intel
competitive advantage. e) Top-of-the-line image- Ralph Lauren, Chanel

Differentiation strategy usually leads to a strategy known as market 15.6.5 Sustaining differentiation strategy
segmentation. Market segmentation is the way a company decides
to group customers, based on important differences in their needs or How to sustain over a long-term period a differentiation strategy is
preferences, in order to gain a competitive advantage. For instance, challenging and daunting task for managers. For one, a continuing
the company can choose to segment its market into different differentiation strategy means a variation in products and services
constituencies and develop a product to suit the needs for each or it every now and then and this may cost a lot of overhead expenses on
may opt to choose to recognize that the market is segmented but certain product lines. The image of the firm as producer or seller of
concentrates on servicing only one market segment, or niche. unique or different kind of products or services may supplant an
image upon the market or the industry it belongs thereby exerting
15.6.1 Objectives of differentiation strategy pressure upon the company which could be difficult in the long-term.

The principal objective of differentiation strategy is to achieve a To ensure a sustained differentiation strategy initiatives, Thompson
competitive advantage by creating a product (goods or services) that and Strickland (1999) consider the following as the most appealing
is perceived by the customers to be unique in some important way. approach to differentiation:
The differentiated company's ability to satisfy a customer's need in
a way that its competitors cannot means that it can charge a premium a) those hardest for rivals to match or imitate; and
price (meaning higher price). The premium price is usually b) those buyers will find most appealing.
substantially above the price charged by the cost leader, and the
Thompson and Strickland further suggest that among the best
customers pay it because they believe the product's differentiated
choices for gaining a longer-lasting and more profitable competitive
qualities are worth the difference.
edge in the area of differentiation strategy are the following:
Specifically, the objectives of differentiation strategy are as follows:
a) new product innovation;
a) incorporate differentiating features that cause buyers to b) technical superiority;
prefer firm's product or service over brands of rivals; c) product quality and reliability;
b) to produce a product that will serve other market. segment; d) comprehensive customer service; and
and e) unique competitive capabilities.
c) to produce and provide a product or service that will
15.6.6 Differentiation opportunities in the value chain
project another image for the firm.
Looking at the company's value chain is one area where
15.6.2 Keys to success in differentiation strategy
opportunities for differentiation is possible. In particular, processes
To succeed in pursuing a differentiation strategy, doing the following can be examined in the following segments of the value chain can
will be of great help: lead towards product differentiation:

a) find ways to create another form of value for buyers that a) purchasing and procurement activities;
is not easily matched or cheaply copied by rivals; and b) product research and development and product design
b) not spending more to achieve differentiation than the price activities;
premium that can be charged. c) production process/technology-related activities;
d) manufacturing/production activities;
15.6.3 Appeal of differentiation strategies e) distribution-related activities; and
f) marketing, sales, and customer service activities.
It may be considered costly and difficult for the firm to consider
having a variety of products or services but the promises and appeal 15.6.7 Achieving a differentiation-based advantage
it offers in terms of competitiveness serve as the motivating and
rallying point to achieve its goals. The appeal and attractiveness of There are as many possibilities or approaches in differentiating or
differentiation strategies are on account of the following: innovating a product or services and the following approaches can
be a good guide to begin with:
a) Incorporate product features/attributes that lower buyer's be able to serve its market well and do it better than any of its rivals,
overall costs of using product; if any.
b) Incorporate features/attributes that raise the performance
a buyer gets out of the product; Focus or niche strategists exert every effort possible to see to it that
c) Incorporate features/attributes that enhance buyer they can monopolize this particular market and leave the broader
satisfaction in non-economic or intangible ways; market to others. The market size targeted by focus or niche
d) Compete on the basis of superior capabilities; and producers and sellers is usually limited though its combined demand
e) Capitalize on a variety of service schemes to support a may be substantial sufficient for a small producer or seller to survive
product. despite its limited demand in quantitative terms. The relatively small
market size makes it impractical to as many players in this group
15.6.8 When does a differentiation strategy work best? resulting to possibilities of monopolistic condition within the group
or market served by focus or niche strategists.
Just like any other type of competitive strategy, differentiation
strategy has its strong and weak points. In any case, differentiation 15.7.2 Key to success in focus/niche strategy
strategy works best under the following conditions and scenarios:
To succeed and survive in a business using or capitalizing a focus or
a) there are many ways to differentiate a product that has niche strategy means to see to it that it serves or creates a situation
value and pleases customers; where the particular market it serves maintains its demands level and
b) buyer needs and uses are diverse; characteristics. Such scenario has to prevail so that other suppliers
c) few rivals are following a similar differentiation approach; may not take interest in this market segment or sector thus
and maintaining its status as the sole or dominant player in this category
d) technological change and product innovation are fast- of market.
paced.
To succeed in doing in this type of strategy, the philosophy of the
15.6.9 Pitfalls of differentiation strategies focus or niche strategists should be anchored on:

Amidst the promises and opportunities for differentiation strategies a) choosing a market niche where buyers have distinctive
are disadvantages, pitfalls or shortcomings as follows: preferences, special requirements, or unique needs; and
b) developing unique capabilities to serve needs of target
a) trying to differentiate on a feature buyers do not perceive buyer segment.
as lowering their cost or enhancing their well- being;
b) over-differentiating such that product features exceed 15.7.3 Approaches in focus/niche strategy
buyers' needs;
c) charging a price premium that buyers perceive too high Doing a focus or niche strategy is also an opportunity to use any of
failing to signal value; and the other strategies earlier discussed; however, extra efforts have to
d) not understanding what buyers want or prefer and be made to ensure that indeed it is a kind of market that the other
differentiating on the "wrong" things. major players in the market at large cannot serve on account of the
inapplicability of the concept of economies of scale or there is
15.7 Focused or Niche Strategy something in the business that a large majority of the direct and
indirect competitors cannot provide. In other words, its product is
The variety of market or consumer categories and the different not simply unique or different but there is something in its totality
locations they are located give the business organization an that the business can do which others cannot.
opportunity to think and decide what and which particular market or
what particular place to serve. This situation challenges the planners To achieve the above bias of focus or niche strategists, the approach
and strategists to decide to address a broad market or focus efforts to take may take the form of:
to a particular market segment or sector of the economy.
a) Achieve lower costs than rivals in serving the segment - a
Focus strategy is different in that it is directed towards serving the low-cost strategy; and
needs of a limited customer group or segment. Focus strategy b) Offer niche buyers something different from rivals-a
concentrates on serving a particular market niche, which can be differentiation strategy.
defined geographically, by type of customer, or by segment of the
product line. The sector could be either a group or strata of the 15.7.4 Examples of focus strategies
economy (e.g., high-end market or class A market, the low-income
The following are just a few of the firms that use focus or niche
group), a particular group of small-scale producers or businessmen
strategy in the conduct of their business:
using its product as raw material or inputs or small group of buyers
whose needs are not or least served by traditional sources of a a) eBay online auctions
particular product. b) Porsche sports cars
c) Horizon and Comair (commuter airlines) - link major
Niche, a term synonymous to focus, is used to refer to a different or
airports with small cities
unique kind of market which is usually limited in number. Its
d) Jiffy Lube International-maintenance for motor vehicles
similarity with the term focus oftentimes makes it convenient to use
e) Bandag - specialist in truck tire recapping
either focus or niche or both. For instance, concentrating only on a
segment of the product lines means focusing only on say: a) 15.7.5 What makes a niche attractive for focusing?
vegetarian food, and b) designer clothes.
If other business organizations desire to have as many products or
15.7.1 Objectives of focus/niche strategy brands to address a broader market or have a variant of products or
services to be able to have categories of product falling within the
The sole objective of a focus or niche strategy is to concentrate its
ambit of the BCG matrix, others opt to simply look for a particular
attention on a narrow piece of the total market with a view of fully
niche or sector within which they want to conduct their business in
serving the needs of that particular market. The basic strategy used
a quiet or discrete manner beyond recognition of the industry or
by focus or niche strategists is built around the notion they should
sector of the economy where the focus of the media is substantially
present. In doing so, however, focus strategists must see to it that the c) best-cost producer can often out-compete both a low- cost
opportunity within the niche is substantial and sustaining over a long provider and a differentiator when buyers belong to the
term and that it is worth focusing on. lower strata;
d) standardized features/attributes will not meet the diverse
To determine whether a particular sector or niche is worth addressing needs of buyers; and
or focusing on, the following considerations should be addressed: e) many buyers are price and value sensitive.
a) Is the market big enough to be profitable and offers good 15.8.4 Risk of a best-cost provider strategy
growth potential?
b) The niche is not crucial to success of the other players Just like any other form of strategies, there are risks and
particularly the industry leaders. disadvantages involved, some of which are as follows:
c) It is costly or difficult for multi-segment competitors to
meet specialized needs of niche members. a) Risk - A best-cost provider may get squeezed between
d) The focuser has resources and capabilities to effectively strategies of firms using low-cost and differentiation
serve an attractive niche. strategies;
e) Only a few other rivals are specializing in same niche. b) Low-cost providers may be able to siphon customers away
f) The focuser can defend against challengers via superior with a lower price; and
ability to serve niche members. c) High-end differentiators may be able to steal customers
away with better product attributes.
15.8 Best-cost Provider Strategy
15.9 Risks of Generic Competitive Strategies
As shown in Figure 73, best cost provider strategy is a compromise
of the four other competitive strategies. Best-cost provider strategy While there are advantages in a variety of competitive strategies,
imbibes certain characteristics of the other types of competitive there are risks in considering anyone of them. In general, the variety
strategies. More dominantly, however, best-cost provider strategy of risks among each of the competitive strategies are shown in Table
combines emphasis on low-cost and differentiation strategies. Its 11.
basic characteristics are as follows:
15.10 Offensive Strategies
a) make an upscale product at a lower cost; and
The nature of an offensive strategy takes the form of an aggressor
b) give customers more value for their money.
in the market. A company taking an offensive strategist is never a
15.8.1 Objectives of best-cost provider strategies tail ender but one with a mentality of always in the lead or ahead of
the pack with a penchant for intriguing or attacking a competitor
By its nature, best-cost provider strategy is designed to attract a directly or indirectly. Companies opting for an offensive strategy are
broader market traditionally served by the low-cost provider and generally proactive and oftentimes take preemptive actions as part
differentiator. Since the strategy of a best-cost provider has all the of the offensives.
elements of other types of competitive strategies, it has some
advantage in that it can hit a broader market. A business organization engaging in an offensive strategy is
presumed to have sufficient resources and organizational strength as
Generally, the specific objectives of a best-cost provider are as well as superior product or service to be able to launch and sustain
follows: an offensive strategy. The chances for a successful offensive
initiative are improved when it is based on a company's resource
a) deliver superior value by meeting or exceeding buyer strengths and strongest competencies and capabilities.
expectations on product attributes and beating their price
expectations; and 15.10.1 Where offensive strategy should be done
b) be the low-cost provider of a product with good-to-
excellent product attributes, then use cost advantage to Doing or opting for an offensive strategy is not a matter of wild
underprice comparable brands. option or a choice to be made but an intent anchored on solid ground.
The idea of doing or opting for offensive strategy is justified under
15.8.2 What makes best-cost strategy different? the following situation:

While best-cost strategy imbibes the character of a low-cost strategy, a) Offensive strategy is in stable and market or industry
it is different in that the aim of a low-cost strategy is to achieve lower leader status.
costs than any other competitor in the industry; the intent of best- b) It is done in the place of an established competitor's market
cost provider is to make a more upscale product at lower costs than location.
the makers of other brands with comparable features and attributes. c) It used or employed to build new or stronger market
position and/or create competitive advantage.
A best-cost provider cannot be the industry's absolute low- cost
leader because of the added costs of incorporating the additional
upscale features and attributes that the low-cost leader's product
doesn't have.

15.8.3 Competitive strength of best-cost provider

The best-cost provider strategy has the following competitive


strengths compared to the other strategies:

a) its competitive advantage comes from matching close


rivals on key product attributes and beating them on price;
b) success depends on having the skills and capabilities to
provide attractive performance and features at a lower cost
than rivals;
15.10.3 Options and objectives in offensive strategy

The basic objective of offensive strategy is to attack its competitors


ferociously to further enhance its dominance and market share.
Other business firms use offensive strategies to the point of having
in mind the idea of decimating or finishing off their rival to control
the industry of market. In other words, offensive strategists have
monopolistic tendencies.

Offensive strategy looks at the weakness of its competitors in all


aspects from products to service as well as the entire organization as
a whole. Armed with its strengths and competitive advantage,
however, offensive strategists generally attack competitors by
initially targeting weaknesses as this is one of the easiest ways out.

Companies' option for offensive strategy uses strengths and


resources directly against a rival's weaknesses and eventually
launching simultaneous offensives on many fronts. Specifically,
offensive strategists launch several initiatives to achieve the
following objectives:

a) throw rivals off-balance;


b) splinter their attention; and
c) force them to use substantial resources to defend their
position.

15.10.2 Types of offensive strategies 15.11 Defensive Strategy

There are a variety of offensive strategies to employ or use As opposed to offensive strategy, defensive strategy is an option
depending on the sector or situation the business is involved. Some taken by business organizations that are reactive to market
of the offensive strategy options are as follows: conditions. Business firms taking the posture of a defensive strategy
generally view that to avoid further losing their market share or
a) Frontal assault. In this strategy, the firm goes head- to- foothold in the market, they have to do something to deter or counter
head with its competitor. It matches the competitor in the motives and agenda of competitors taking offensive strategies.
every category from the product to the price and
promotional activities. To be successful, the attacker must The basic approach to dealing with defensive strategy is twofold,
not only have superior resources but also the willingness namely:
to persevere. This is generally very expensive and may
a) block avenues open to challengers; and
serve to awaken a sleeping giant.
b) signal challengers that vigorous retaliation is likely if the
b) End run offensives. It is a dodge head-to-head
business is under attack or being pursued.
confrontations that escalate competitive intensity or risk
cutthroat competition. It attempts to maneuver around 15.11.1 Objectives of defensive strategy
strong competitors concentrating on areas of market where
competition is weakest. Taking the defensive posture is a matter of choice or in reaction to
c) Guerilla warfare. It uses the principle of surprise and hit- an offensive move by any of the competitors in the industry. It is
and-run to attack in locations and at times where aimed at achieving the following objectives:
conditions are most favorable to initiator. It is well- suited
to small challengers with limited resources and market a) fortify firm's present position;
visibility. b) help sustain any competitive advantage held;
d) Bypass attack. Rather than directly attacking the c) lessen risk of being attacked;
established competitor frontally or on its flanks, a d) blunt impact of any attack that occurs; and
company or business unit may choose to change the rules e) influence challengers to aim attacks at other rivals
of the game. This strategy attempts to cut the market out 15.11.2 Some specific defensive options
from under the established defender by offering a new type
of product that makes the competitor's product Whether the business organization is an industry leader or a runner-
unnecessary. up, either is subject to attack or offensive strategies of others simply
e) Flanking attack. Rather than going straight for a because among others, business is a marketing war. Given this, it is
competitor's position of strength with a frontal assault, a necessary to use or employ defensive strategies or do counter-attack
firm may attack a part of the market where the competitor or else decimate.
is weak.
f) Encirclement. It usually evolves out of frontal assault or Doing the following defensive options will be of great help to
flanking maneuver. Encirclement occurs as an attacking survive in business competition especially under hostile conditions:
company or unit-encircles the competitor's position in
a) Raise structural barrier. This means raising the walls of the
terms of products or markets or both. The encircler has a
business to avoid being attacked or creating entry barriers
greater product variety (a complete product line ranging
meant to block a challenger's logical avenues of attack. The
from low to high price) and/or serves more markets (it
structural or market barriers are suggested by Porter as follows:
dominates every secondary market)
i. offer a full range of product in every profitable market
segment to close off any entry points;
ii. block channel access by signing exclusive agreements
with distributors;
iii. raise buyer switching costs by offering low-cost training
to users;
iv. raise the cost of gaining trial users by keeping prices low
on items new users are more likely to purchase;
v. increase scale economies to reduce unit costs;
vi. foreclose alternative technologies through patenting or
licensing;
vii. limit outside access to facilities and personnel;
viii. tie up suppliers by obtaining exclusive contracts or
purchasing key locations;
ix. avoid suppliers that also serve competitors; and
x. encourage the government to raise barriers such as safety
and pollution standards or favorable trade policies.
b) Lower the inducement for attack. This type of defensive
strategy is meant to reduce a challenger's expectations of future
profits in the industry. For example, an airline company can
deliberately keep prices low and constantly invest in cost-
reducing measures. With prices kept very low, there is little
profit incentive for a new entrant.
c) Increased expected retaliation. This involves any action that
increases, the perceived threat of retaliation for an attack. For
example, management may strongly defend any erosion of
market share by drastically cutting prices or matching
challenger's promotional activities through a policy of
accepting any price reduction coupons for a competitor's
product.

15.12 Preemptive Strikes and Some Options to Take

As the term implies, preemptive strategies takes the form of an effort


to do something in case of eminent danger or before any perceived
untoward incident happens. This means that after a series of market
research and industry situation analysis pointing to an eminent
danger on the market position and stability of the firm, something
has to be done. While it may be costly to do market research and
surveillance and to launch preemptive strikes, it might be justified in
a scenario where the very existence of the firm as a sustainable and
profitable position is at stake.

Preemptive strikes may come in any of the following moves:

a) acquire firm which has exclusive control of a valuable


technology;
b) secure exclusive/dominant access to best distributors;
c) tie up best or most sources of essential raw materials;
d) secure best geographic locations;
e) obtain business of prestigious customers;
f) expand capacity ahead of demand in hopes of
discouraging rivals from following suit; and
g) build an image in buyers' minds that is unique or hard to
copy.

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