Ansoff versus Three Generic Strategies - Essay Example

?Introduction Porter’s Five Forces is considered as one of the most important strategic frameworks in the strategic management to understand and explore the competitive nature of an industry. It also serves as an important tool for any organization to study as to how the different competitive forces may have an impact on it and how it can respond to them. What is also important to understand that Porter also suggested three important strategies which can be used in order to successfully deal with five forces. Though Porter’s Generic strategies as well as the Five Forces model is considered effective however, there are also other alternative models outlining as to how a firm can successfully deal with the competition and make strategic decisions. One such model is the Ansoff’s Matrix which is also called the Product Market Expansion Grid. Developed in 1975, this matrix largely depends upon the product as well as the industry in which a firm operates and resultantly offers different choices to a firm in order to deal with different strategic challenges. Ansoff’s Matrix suggests four important strategic alternatives available to a firm to successfully operate under a given competitive scenario. These strategies include market penetration, product development, Market Development as well as diversification. This paper will attempt to first explain and explore Five Forces Model along with three generic strategies as suggested by Porter to successfully outperform other firms in the industry. Finally a comparison will be made between three strategies and the Ansoff’s Matrix to strategic development. Porter’s Five Forces Model In order to comprehensively discuss three generic strategies, it is important firs to outline and explore Porter’s Five Forces Model to provide a necessary theoretical background to overall discussion. Suppliers’ Power Suppliers’ Power is one of the key forces defining the overall competitiveness of an industry. When a firm needs to assess the Suppliers’ Power, it needs to take into consideration factors like the concentration of suppliers’, the overall significance of volume for the suppliers, whether there are substitute inputs are present, whether suppliers are facing the threat of forward integration or not. These are some of the key factors which need to be looked at in order to critically assess as to how the suppliers may have an impact on the firm. This is also critical owing to the fact that reliance on one supplier or few suppliers may geoperadize the overall position of a firm within an industry and therefore it is critical for a firm to assess this power in more critical manner. Buyers’ Power Buyers’ Power is also critical in the sense that it directly defines as to how the demand dynamics of the firm will behave if buyers have relatively superior bargaining power. This factor becomes more critical if the firm is involved in the B2B type of business with large buyers forming stronger clout. Factors such as brand identity, sensitivity towards price changes, threat of backward integration as well as the availability of substitutes can really define as to how buyers may have an impact on the firm. Threat of New Entrants When an industry is profitable and the prospects of earning profitability are sizeable, new firms tend to enter into the market in order to share the gains. Thus the overall threat of new entrants is considered as significant for any firm working in any industry. Factors such as barriers to entry, cost advantages as well as economies of scale and stronger brands are some of the factors which can allow a firm to successfully meet the threat of new entrants in the market. It is also important for a firm to critically assess this possibility and develop its competitive advantage and core competencies so that it can successfully withstand the challenges posed by the new firms. Threat of Substitutes Threat of substitutes can also be an important force which can result into significant strategic challenges for a firm. Threat of substitutes however, can be reduced if the firm can ensure that it has higher switching costs for its customers however, if buyers are more inclined towards the substitute products, it may be extremely difficult for the firm to successfully challenge the firms offering substitute products. Rivalry in the Industry The above forces when combined together can define the overall level of rivalry between the firms in any given industry. Though there are other important factors such as slow market growth, higher exit barriers etc which can also shape the competition however, these forces are considered as essential for the overall successful of a firm in any given competitive industry. Porter’s Generic Strategies The above grid suggests that the there are three important generic strategies which a firm can employ in order to become competitive as well as withstand the different forces outlined above. It is also important to note however that each strategy can be executed under different conditions and may not fit under all the situations arising out of the external environment of the firm. A firm should take one of the three strategies to be the main principal and there is no possibility that the enterprise can take all the strategies at one time (Jegers, 1994). As the three strategies focus on the different aspects, which strategy the enterprise should choose determine how the enterprise should be handled and the resources required. If the enterprise cannot concentrate on one strategy but attempt to balance all the sides, the enterprise may lose more for the counterpoise. Cost leadership Strategy Cost leadership which is also called overall cost leadership is a strategy that the firm makes efforts to reduce production costs to become a low cost producer. The outcome of adapting this strategy will allow the company to reduce and save cost so that the company can be a low priced product provider and the required market share. Cost leadership strategy however, can only be successfully implemented and executed if economies of scales are achieved. There are a lot of examples that can be considered as to how a company can become profitable through cost leadership strategy: Wal-mart is an American public multinational corporation famous for offering low priced products on sale and its main market strategy is based upon cost leadership. Wal-mart takes steps on to reduce packaging and energy costs and attempts to become the biggest buyer of milk and organic cotton in order to get the bargain rights in the negotiation with the supplier to maintain the sales volume (Richard S. Allen,Marilyn M. Helms, 2006). Differentiation Strategy When a differentiation strategy is adapted by a company, it should make the customers feel the product of the company is different from or better than other product of competitors in the industry. The customers can feel unique or particular on the product or the service and then the company can charge premium to customers, in this way the company can get more profit on the product or service selling compared with rivals. However, the differentiation and the uniqueness can attract more costumers but will also increase costs therefore the overall costs may be transferred to the customers making the products expensive for the end users.. For example, Apple Inc made a series of electric product which are well known by the inimitable customer user experience (John P. McCray,Juan J. Gonzalez,John R. Darling, 2011). What is however, important to note that the Apple has been successfully in developing effective relationships with its customers and is resultantly able to charge premium prices to its customers due to its carefully designed differentiation strategy. Focus Strategy According to Porter’s generic strategy, a focus strategy is a not isolated strategy, but it can only be put into practice with differentiation strategy or cost leadership strategy. The firm can choose to focus on a special costumer or on a particular kind of product, even on a geographic segment. In addition to this, an enterprise can implement this strategy that can compete in the mass market with a wide scope or on a focus market with narrow scope. Differentiation strategy and cost leadership strategy can only be undertaken on the enterprise level and consider all market segments; however, focus strategy can just be adopted by one department or a geographic area (John A. Parnell, 2006). A typical firm can meet the differentiation strategy through Focus also on any particular objective or even can achieve the low cost advantage or attempt to accomplish both the objectives at the same time with the help of Focus strategy. The luxury car market is a typical market area where focus strategy can be seen anywhere. As one of most famous luxury car brand, Bentley is for the customers that are super rich and hungry for speed; in 1998 the British Bentley was purchased by a Germany company, Volkswagen. Volkswagen sticks on Bentley luxury and focus on high class customer but did not mix Bentley with normal cars. Even though the Volkswagen did not achieved cost leadership strategy, but as the uniqueness is doubtless, it employed a combination of both the differentiation strategy and focus strategy. Ansoff Matrix Ansoff matrix is presented by a 2 X 2 matrix to show how a firm can become profitable or how to get market shares. The horizontal axis, the matrix is represented by two types of products: existing products and new products whereas on the vertical axis there are two types of markets: existing markets and new markets. In the existing products and existing markets, market penetration strategy should be adopted to develop the existing products to get more market share and maintain the brand loyalty. Product development should used in the existing markets when the new products come out requiring sales promotion to the existing customers (Nandakumar,Ghobadian & O'Regan, 2011). Market development means to sell more existing products to new markets that means the company should exploit new markest and gain more customers in new place. A diversification strategy means the company should carry new products to new market area, in this market strategy, the experience has gained by the company is useless, so the strategy is a venturesome strategy required more Synergy. Ansoff’s Matrix is also important in the sense that it offers a concise and brief set of strategies to be adapted under different market conditions. The similarity and difference between Ansoff’s approach and three generic strategic approaches Ansoff matrix and three generic strategies are both designing for ensuring that the businesses are top performers and remain in competitive position. In particular, when looking at the specific segments of the two strategies, there are some similarities between them. For example, cost leadership strategy of Porter and market penetration strategy of Ansoff are both based on the existing products and existing markets recommend selling the product (Ansoff, 1987). However, there is some differences between the two strategies also as cost leadership strategy focuses on the cost cutting to lower the price of the product and high volumetric then stimulate the sale. However, a market penetration still focus on high volume but it still emphasizes on developing new customers on current market with the same products. The two strategies are less risky strategies as they are implemented by cutting external and internal costs and stimulate the sales (Aldraci et al 2011). There are other strategies which have similarity such as the differentiation strategies of generic strategies and the product development strategies in the Ansoff matrix. Both the two strategies purchase for high profits with inimitable product that different from others and stress the uniqueness of the products. The companies use the two strategies to get market shares with new products in the existing market. However, there is difference between the two strategies, the products with differentiation strategies can show up with other types but not just new. The company can provide different costumers service and focus on specifically regions and customer arrangement but not just focus on new geography area. Similarly, differentiation strategy of Porter and market penetration of Ansoff both focus on market shares gaining. At the same time, a differentiation strategy can use the service or make effort to develop new products to gain the existing market shares but not like market penetration just use existing products to develop new markets. In addition to this, three generic strategies are more suitable to be taken in the early stage of a company’s development (Parnell, 2011). Then the whole company will have a total strategy and the whole company has a collective direction and place the company into right industry. After that Ansoff matrix can be adopted to analyze the accurate policy for the next steps. For example, a company can choose to take focus strategy with high class customers and then use product development strategy to fractionize how to gain profits with new products. Additionally, the two strategies stress on different points, Ansoff emphasizes in which field an enterprise should do while the three generic strategies stresses in this field how the enterprise should do. Advantages and disadvantages of using the two strategies According to the two strategies, it is natural to mention the advantages and disadvantages. When mentioned advantages, it is easy to tell that as they both have the objectives that guide companies. Broken apart, in three generic strategies, using cost leadership strategy can help a company cut cost and gain the profit space. Market penetration has the same effect as it base on existing market and existing products, more resource will be saved without exploiting new geographic and economic area (Thompson, 2011). A focus strategy will help the development of customer loyalty and cut the buyer power of bargaining, it also can supply a gap that a substitute company that wants to get into the industry. It is same with product penetration of Ansoff as it is taken by developing new products in existing area and sale new products to existing customers. The sale action will gain customer loyalty. As far as differentiation strategy, adopting this strategy can make a company focus the resource that available to service to one segment or area which avoiding source wasting. It will be easier to control and manage the company. The same effect will show up with diversification strategy of Ansoff matrix, they both purchase the new products or new markets and both of them are two risky strategies because the companies use the two strategies will explore in the development process. To discuss the disadvantages of using three generic strategies and Ansoff matrix, it is easy to mention the risk the strategies will bring. When a firm using cost leadership strategy, the firm has to face to the risk of less profit space which may lead to financial crisis. Comparing with this strategy, when a firm uses market penetration strategy, the company may face market saturation in existing market that will also lead to no income of the firm. A differentiation strategy will also bring out risks, if a company strategy makes the products much too different from other products in the industry, the recognition of customers will be a challenge to the firm. The same situation will happen with diversification strategy, when a company explore a whole new market with new products, there will exists more problems of law or financial (Klein, 2011). Finally, if a firm uses a focus segment strategy of generic strategies, when the firm takes market penetration strategy to develop new market, the products issues may be ignored by the company, vice versa, when the company takes a product penetration strategy, the market part may be ignored. Conclusion: As we mentioned above, through the introduction of the three generic strategies and Ansoff matrix, we also have used a range of examples for all sides, it can be figured out that three generic strategies can be used at first, however, the three forces can’t be used at a same time but the company should pick one of the three strategies and focus on one goal (Dandira, 2011). The three generic strategies can be used with Ansoff and other strategy tools. In addition to this, Ansoff matrix can be used as analyze tools to some extent and should used by specifically environment. It seems that how a company implements the strategies and to which extent the employees carry out the strategies and the abilities the whole company assort with each apartment is also essential. There is also some limitation as there are some unexpected events will occur such as economy crisis, unanticipated conjuncture. The factors will take these deregulation issues into consideration. For example, China International Capital Corporation Limited, as one of the most important investment bank takes focus strategy when it invest overseas and invested its most to America but in 2009, subprime crisis broke out and influenced CICC that most of its border investment in vain and leaded to unemployment in its over departments. The critic figured out that if the company took diversification strategy and invested at more segments, the broke up of its overseas department would not happen (Aharoni, 2011). To conclude, a strategy is necessary when a compared wants to keep up with the competition. Reference: Gerald Watts, Jason Cope, Michael Hulme, (1998) "Ansoff’s Matrix, pain and gain: Growth strategies and adaptive learning among small food producers", International Journal of Entrepreneurial Behaviour & Research, Vol. 4 Iss: 2, pp.101 – 111 H. Igor Ansoff, (1987) "STRATEGIC MANAGEMENT OF TECHNOLOGY", Journal of Business Strategy, Vol. 7 Iss: 3, pp.28 – 39 Mike J. Thompson (2011), Managing Sustainability for Economic Return in the Multinational Enterprise, in William H. Mobley, Ming Li, Ying Wang (ed.)Advances in Global Leadership (Advances in Global Leadership, Volume 6), Emerald Group Publishing Limited, pp.117-135 Yair Aharoni (2011), Behavioral Elements in Foreign Direct Investment Decisions, in Ravi Ramamurti, Niron Hashai (ed.) The Future of Foreign Direct Investment and the Multinational Enterprise (Research in Global Strategic Management, Volume 15), Emerald Group Publishing Limited, pp.23-60 Martin Dandira, (2011) "Involvement of implementers: missing element in strategy formulation", Business Strategy Series, Vol. 12 Iss: 1, pp.30 – 34 Rosalia Aldraci Barbosa Lavarda, Maria Teresa Canet Giner, Fernando Juan Peris Bonet, (2011) "Understanding how the strategy formation process interacts with the management of complex work", European Business Review, Vol. 23 Iss: 1, pp.71 – 86 Marc Jegers (1994), Methodological limitations of Porter's three generic strategies' framework, in (ed.) 4 (Research in Global Strategic Management, Volume 4), Emerald Group Publishing Limited, pp.43-49 John A. Parnell, (2011) "Strategic capabilities, competitive strategy, and performance among retailers in Argentina, Peru and the United States", Management Decision, Vol. 49 Iss: 1, pp.139 – 155 Andrew Klein, (2011) "Corporate culture: its value as a resource for competitive advantage", Journal of Business Strategy, Vol. 32 Iss: 2, pp.21 – 28 John P. McCray, Juan J. Gonzalez, John R. Darling, (2011) "Crisis management in smart phones: the case of Nokia vs Apple", European Business Review, Vol. 23 Iss: 3, pp.240 – 255 Richard S. Allen, Marilyn M. Helms, (2006) "Linking strategic practices and organizational performance to Porter's generic strategies", Business Process Management Journal, Vol. 12 Iss: 4, pp.433 – 454 John A. Parnell, (2006) "Generic strategies after two decades: a reconceptualization of competitive strategy", Management Decision, Vol. 44 Iss: 8, pp.1139 – 1154 M.K. Nandakumar, Abby Ghobadian, Nicholas O'Regan, (2011) "Generic strategies and performance – evidence from manufacturing firms", International Journal of Productivity and Performance Management, Vol. 60 Iss: 3, pp.222 - 251 Read More