Strategic Planning Essay 850 – 1000 word limit

Strategy formulation

Michael Porter says: ‘The company without a strategy is willing to try anything.’⁴⁹ With a good strategy in place, on the other hand, the resources of the entire organisation can be focused on the overall goal — superior profitability or above-average returns. Whether one is talking about building e-business strategies for the new economy or crafting strategies for more traditional operations, it is always important to remember this goal and the need for sustainable competitive advantage. The major opportunities for competitive advantage are found in the following areas, which should always be considered in the strategy formulation process:⁵⁰

1. cost and quality — where strategy drives an emphasis on operating efficiency and/or product or service quality

2. knowledge and speed — where strategy drives an emphasis on innovation and speed of delivery to market for new ideas

3. barriers to entry — where strategy drives an emphasis on creating a market stronghold that is protected from entry by others

4. financial resources — where strategy drives an emphasis on investments and/or loss sustainment that competitors can’t match.

Importantly, any advantage gained in today’s global and information-age economy of intense competition must always be considered temporary, at best. Things change too fast. Any advantage of the moment will sooner or later be eroded as new market demands, copycat strategies and innovations by rivals take their competitive toll over time.⁵¹ The challenge of achieving sustainable competitive advantage is thus a dynamic one. Strategies must be continually revisited, modified and changed if the organisation is to keep pace with changing circumstances. Formulating strategy to provide overall direction for the organisation thus becomes an ongoing leadership responsibility.⁵²

Fortunately, a number of strategic planning models or approaches are available to help executives in the strategy formulation process. At the business level, one should understand Porter’s generic strategies model and product lifecycle planning. At the corporate level, it is helpful to understand portfolio planning, adaptive strategies and incrementalism and emergent strategies.

Porter’s generic strategies

Michael Porter’s five forces model for industry analysis was introduced earlier. Use of the model helps answer the question: Is this an attractive industry for us to compete in? Within an industry, however, the initial strategic challenge becomes positioning your organisation 243and products relative to competitors. The strategic question becomes: How can we best compete for customers in this industry?⁵³ Porter advises managers to answer this question by using his generic strategies framework shown in figure 9.6

FIGURE 9.6 Porter’s generic strategies framework: motor vehicle industry examples

According to Porter, business-level strategic decisions are driven by two basic factors: (1) market scope — ask: ‘How broad or narrow is your market target?’ and (2) source of competitive advantage — ask: ‘How will you compete for competitive advantage, by lower price or product uniqueness?’ As shown in the figure, these factors combine to create the following four generic strategies that organisations can pursue. The examples in the figure are of competitive positions within the motor vehicle industry.

1. Differentiation — where the organisation’s resources and attention are directed towards distinguishing its products from those of the competition (for example, BMW, Volvo).

2. Cost leadership — where the organisation’s resources and attention are directed towards minimising costs to operate more efficiently than the competition (for example, Hyundai, KIA).

3. Focused differentiation — where the organisation concentrates on one special market segment and tries to offer customers in that segment a unique product (for example, Land Rover, Subaru).

4. Focused cost leadership — where the organisation concentrates on one special market segment and tries in that segment to be the provider with lowest costs (for example, Suzuki).

Organisations pursuing a differentiation strategy seek competitive advantage through uniqueness. They try to develop goods and services that are clearly different from those made available by the competition. The objective is to attract customers who become loyal to the organisation’s products and lose interest in those of competitors. This strategy requires organisational strengths in marketing, research and development, technological leadership and creativity. It is highly dependent for its success on continuing customer perceptions of product quality and uniqueness. An example in the apparel industry is Polo Ralph Lauren, retailer of upscale classic fashions and accessories.

Organisations pursuing a cost leadership strategy try to continuously improve the operating efficiencies of production, distribution and other organisational systems. The objective is to have lower costs than competitors and therefore achieve higher profits. This requires tight cost and managerial controls as well as products that are easy to manufacture and distribute. Of course, quality must not be sacrificed in the process. In fast food, 244McDonald’s remains the most cost-effective operation of its type through preferential bulk-purchasing agreements with suppliers, de-skilled and often automated in-house operations, and large customer volume providing economies of scale. It also uses one of the youngest and least expensive labour forces. It pays the minimum wage and keeps most staff on part-time or casual employment, thereby escaping government requirements to pay superannuation and other statutory full-time entitlements.⁵⁴

Since its inception in the early 1990s, Aussie Home Loans has captured a small but significant share of the Australian mortgage market from the traditional lenders — banks and building societies — through keeping its costs low and passing these savings on to the consumer. Its low overheads and younger staff profile have been key ingredients of its low-cost strategy. The company has since applied this low-cost strategy to additional product offerings including car and personal loans, credit cards and insurance.

Organisations pursuing a focused differentiation strategy or a focused cost leadership strategy concentrate attention on a special market segment with the objective of serving its needs better than anyone else. The strategies focus organisational resources and expertise on a particular customer group, geographical region or product or service line. They seek to gain competitive advantage in product differentiation or cost leadership. Importantly, focused strategies require willingness to concentrate and the ability to use resources to special advantage in a single area.

BCG MATRIX

Figure 9.8 summarises an approach to business portfolio planning developed by the Boston Consulting Group and known as the BCG matrix. This framework ties strategy formulation to an analysis of business opportunities according to industry or market growth rate and market share.⁵⁸ This comparison results in the following four possible business conditions, with each being associated with a strategic implication: stars — high market share, high-growth businesses; cash cows — high market share, low-growth businesses; question marks — low market share, high-growth businesses; and dogs — low market share, low-growth businesses.

FIGURE 9.8 The BCG matrix approach to corporate strategy formulation

Stars are high market share businesses in high-growth markets. They produce large profits through substantial penetration of expanding markets. The preferred strategy for stars is growth, and further resource investments in them are recommended. Question marks are low market share businesses in high-growth markets. They do not produce much profit but 247compete in rapidly growing markets. They are the source of difficult strategic decisions. The preferred strategy is growth, but the risk exists that further investments will not result in improved market share. Only the most promising question marks should be targeted for growth; others are restructuring or divestiture candidates. Cash cows are high market share businesses in low-growth markets. They produce large profits and a strong cash flow. Because the markets offer little growth opportunity, the preferred strategy is stability or modest growth. ‘Cows’ should be ‘milked’ to generate cash that can be used to support needed investments in stars and question marks. Dogs are low market share businesses in low-growth markets. They do not produce much profit, and they show little potential for future improvement. The preferred strategy for dogs is retrenchment by divestiture.