Importance of Achieving Strategic Fit - Essay Example

? Business strategic management Table of contents Importance of achieving strategic fit 3 Porter’s five forces framework as a tool of competitor analysis 5 Rationale behind revolutionary and evolutionary approach to change 10 Strategic drift 12 Ways to avoid strategic drift 13 Role of administrative management in implementing strategic change in organisation 14 References 17 Importance of achieving strategic fit When an organization has diversified portfolio in its business, the management of such organization forms strategic business unit. Johnson & Johnson has large number of employees operating in more than 250 companies in around 57 countries of the world. All the operating companies of Johnson & Johnson have three principal strategic business groups or units which are pharmaceutical group, consumer division, diagnostics and medical devices. Strategic fit characterizes the degree of matching the capabilities and resources of an organization to the opportunities prevailing in the external environment. The matching takes place through strategy so the company is required to have its actual capabilities and resources for supporting and executing the strategy Strategic fit can be actively used for evaluating the current strategic situation of a company along with the opportunities of divestitures and mergers and acquisitions of divisions of organization. Strategic fit is also viewed on the basis of resources of the firm suggesting that industry selection and positioning is not only the key to profitability rather an internal focus utilising the unique characteristics of the resource portfolio of the company and its capabilities is the key to profitability. Johnson & Johnson successfully competes in global drug market in the mature segment by using revolutionary innovation continuously and it also competes in the emerging markets by efficient development of technologies by means of revolutionary innovations which are reliant on motivated and skilled human resource elements for achievement of strategic goals. Strategic fit can be classified into market related fit, operational fit and management fit. Market related fit arises when value chain of different businesses overlap so that the products can be used by same customers, promoted and marketed in a similar way and have common distribution channel (Chopra, 2010, pp.24-26). Operational fit arises when different businesses work along for exploring opportunities of skill transfer and cost sharing. Management fit revolves among both the businesses in terms of some comparable units like operating problems, administration and various administrative activities. It also allows accumulated managerial know how in one business to be used in managing other business. It is necessary that the management of business should take actions to capture benefit (Armstrong, 2003, pp.116-117). Benefits with sharing potential must be recognized so that the activities to be shared are coordinated and merged. When skill transfer takes place, a means must be found to make it effective. It is required for the medium sized business to achieve strategic fit as it provides consistency between customer priorities of competitive strategy and capabilities of supply chain as specified by the strategy of supply chain (Dessler, 2010, p.51). The strategies of supply chain and competitive strategy have the same goal. Due to lack of strategic fit, a company may fail. Achievement of strategic fit involves three steps. These involves the understanding the uncertainty in supply chain and customer, understanding the capabilities of supply chain and achieving strategic fit (Armstrong, 2008, p.38). Strategic fit has a central role for playing in strategic management. While the external strategic fit is relevant to formulate strategy, the internal strategic fit is critical to the implementation of strategy (Gabriel, 2008, p.133). A high strategic fit is important as it enables the scope of learning new skill sets, timely and appropriate response, resource commitment from top management, better operational and strategic control, changing the rules of game and development of competencies and capabilities (Peng, 2008, p.276). The strategic fit reflects the extent to which the activities of a single organisation or organisations working in partnership complement each other in a way to contribute towards competitive advantage. The benefit of good strategic fit involves economies of scale, cost reduction and transfer of skill and knowledge (Armstrong and Baron, 2002, pp.29-34). The success of a joint venture, merger or strategic alliance can be affected by the degree of strategic fit between the organizations involved (Stahl, 2004, p.21). Similarly, the strategic fit of one organization with another is a factor in decisions about merger, acquisition, divestment or diversification (Grembergen and Haes, 2009, pp.7-8). When value chains of different businesses are related, there exists strategic fit. These different value chains allow transferring expertise and skill from one business to other, and their combined performances work to reduce cost (Analoui and Karami, 2003, p.163). Porter’s five forces framework as a tool of competitor analysis Michael Porter’s five forces provides a model to explore the environment in which a company or product operates to generate competitive advantage. The analysis of Porter’s five forces focuses at five key areas mainly the threat of entry, power of supplier, power of buyer, threat of substitutes and competitive rivalry (Henry, 2008, pp.69-70). This five forces tool is vital in analysing the industry structure of an organization in strategic processes. Fig. Five forces that shape industry competition Source: Harvard Business Review, 2008 The five forces model is based on the insight that a corporate strategy should meet the threats and opportunities in the external environment of the organization (Society for Human Resource Management Staff, 2006, pp.38-39). The competitive strategy should be based on the understanding of industry structure and the way it change. There are five competitive forces which has been identified by Porter determine the competition intensity and thus the profitability and attractiveness of an industry (Hill and Jones, 2007, pp.45-50). The objective of corporate strategy should focus towards modifying the competitive forces in a manner improving the position of organisation. Porter’s model supports analysis of driving forces in an industry. The management can decide on how to exploit or influence particular characteristics of its industry on the basis of information derived from the analysis of Porter’s five forces. Porter’s five forces for competitive advantage Threat of new entrants The threat of new entrants is not of particular concern to Johnson & Johnson. However, the medium sized business is more prone to cut throat competition if new companies enter the industry easily. Factors limiting the threat of new entrants are called barriers to entry (Hill and Jones, 2009, pp.42-43). Certain examples include brand equity, entry protection, scarcity of resources, high fixed costs, existing loyalty to major brands, access to distribution, economies of product differences, absolute cost advantages, capital requirements, learning curve advantages, sunk costs or switching costs etc. Power of suppliers This reflects how much pressure can be placed by suppliers on a business. If one supplier has a large impact to affect the volume and margin of a company, they hold substantial power (Stonehouse et al., 2007, pp.118-119). There are few reasons that suppliers might have power. There are very few suppliers of particular product; supplying industry has higher profitability than the buying industry, there are no substitutes, supplier concentration to firm concentration ratio, presence of substitute inputs, threat of forward integration by suppliers relative to threat of backward integration by firms, product is extremely important to buyer, degree of differentiation of inputs etc (McGuigan, Moyer and Harris, 2010, pp.342-347). Power of customers/buyers It reflects how much pressure customers can place on business. If one customer largely affects the volume and margin of a company, then they hold substantial power. There are few reasons that customers might have power (Tawari, 2009, p.147). These can be purchases of large volumes, small number of buyers, buyer volume, bargaining leverage, ability of backward integration, sensitivity of buyer price, buyer switching costs in relation to firm switching costs, total purchase price etc. Availability of substitutes It reflects the likelihood of switching to competitive product or service. Here, Johnson & Johnson is a major competitor of the medium sized business. There is a high chance of switching to the products of Johnson & Johnson. If the cost of switching is low, it poses a serious threat (Nemati and Barko, 2004, pp.29-32). The following factors can influence the threat of substitutes: switching costs of buyers, product innovation and change in technology, the level perceived on product differentiation, price performance of relative substitutes, buyer propensity to substitute etc. The similarity of substitutes is the main issue. If the price of coffee substantially rises, the coffee drinker can switch to beverage like tea because the products are similar (Papp, 2001, pp.135-136). If substitutes are similar, it can be viewed as a new entrant in the same light. Technology substitutes can be considered like MP3 technology replacing CD’s and tapes. Competitive rivalry The intensity of competition in the medium sized industry between the existing firms can be described by competitive rivalry. Highly competitive industries because of high cost of competition generally earn low returns. A highly competitive market can result from little differentiation between products and services of competitors, growing of companies by stealing customers from competitors, mature industry with little growth and many players of same size. Rivals sometimes compete aggressively and sometimes they compete in non price dimensions like marketing, innovation etc. Porter’s five forces analysis can provide valuable information on three aspects of corporate planning: Statistical analysis The five forces analysis determines the attractiveness of the industry. It provides insights on profitability. It supports decisions concerning entry or exit from market segment or industry. Moreover, model can be used for comparing the impact of competitive forces on its own organization with that of its competitors (Afuah, 2009, pp.337-343). Competitors can have different options to react to changes in competitive forces from their different resources. This can influence the structure of whole industry. Dynamical analysis Combining with PESTLE analysis which acts as drivers for change in industry, Porter’s five forces analysis reveals insights about the potential future attractiveness of industry. The five competitive forces can be influenced by expected economical, political, technological, socio demographical, environmental and legal changes which can impact the structure of industry. Analysis of options Through the knowledge of power of competitive forces and intensity, options can be developed by organizations to make its influence to improve its own competitive position. This could result in a new strategic direction like differentiation for competitive products, new positioning. Rationale behind revolutionary and evolutionary approach to change Johnson & Johnson is engaged in both revolutionary and evolutionary changes. The analysis of changing process of both revolutionary and evolutionary changes is dependent on organisational size and age and culture which form the critical factors in the determination of outcome and the changing process. The complex and huge structure of Johnson & Johnson requires a group of skilled management which can exploit the power of control and can encourage innovation at the lower level of business units. The bureaucratic system will pose a potential risk to Johnson & Johnson which can lower the adaptability to evolutionary and revolutionary change and the responsiveness. The increasing political factors can determine the shape and evolvement of global economy with relation to the pharmaceutical products. This can potentially impact the evolutionary process of Johnson & Johnson because of the changing rules which has been restructured by the industrial regulations on account of political reasons like regulation of operation in a developing country. This requires evolutionary adjustments to compete in global markets. The political influences are addressed largely at the level of strategic decision making for organisations so it requires awareness for Johnson & Johnson regarding increase in the involvement of government through regulatory actions. In revolutionary change, change is orchestrated by one person from the top. The change is concerned towards regaining control over an organisation and cutting costs that has been lost due inappropriate risks been taken or due to the inability of looking externally and becoming driven inwardly. The revolutionary change is driven by one individual who is surrounded by a small group of trusted lieutenants. The process of change becomes reliant on the individual itself. In evolutionary change, the change is still orchestrated by the leader. The leader empowers people throughout the organisation to take the change. Training, resources and authority is provided by the leader to people to make engaged in the change and to become leaders of the change in their own. The revolutionary approach is the only method applicable for an organisation having burning platform. For an individual, the choice is about remaining true to oneself. Revolutionary approach is not appropriate for an individual who is not decisive, whose nature is not fast moving and who does not have few regrets. Similarly, the evolutionary approach is not appropriate for an individual who does not have the nature of empowering people, delegating authority and providing strong leadership on the work required to be done. The choice of evolutionary or revolutionary change for organisations is influenced by internal or external factors. The dysfunctional management team is the powerful internal factor that is encountered surprisingly on frequent basis. The aspects of dysfunctional management team are featured by the inability of making decision, slow progress towards goal, and absence of accountability, poor morale among the reports and constant activity reprioritisation. The dysfunctional organisations require revolutionary change. Revolutionary change is also required to cope with powerful external shocks like large change in economy. Revolutionary change does not refer to the absence of communication. It means that communication is the inevitability of precise change, not whether change will happen or not. While revolutionary change is necessary at times but it is not always inevitable. Organisations who have built the culture of evolutionary change can accustom with external shocks without any requirement of revolutionary change. While revolutionary change is required oftenly in an organisation but it can be a sign of poor management if the organisation is unable to instil the culture of evolutionary change. Organizations deal with continuously changing and dynamic environment which requires the businesses to devise methods to respond towards its surroundings in a well equipped manner. In addition to the preference of change method, it is essential to consider the external opportunities, culture and threat, internal culture and capability to adopt the right kind of approach. It is vital because when strategic changes are adopted, be it large or small, these are neither normal nor simple, so they are required to be adopted with proper analysis and care of the situation. So, it is advised that management and employees should focus upon learning the interpersonal, diagnostic and appropriate leading skills to accomplish the strategic change targets effectively. Strategic drift Strategic drift is a gradual change which occurs in such a manner that it is almost unnoticed until it is too late. Strategic drift occurs in professional services firm because professionals have their own perspectives. They are independent of what the leaders of firm may think. Professionals view themselves as running their own businesses. So, strategic drift is inherent in business model of professional service. Its costlier and problematic aspects depend on how well it is managed. With the changing expectations of customers, organisations are required to adapt constantly to remain competitive. When faced with the pressure of change, managers often look for situations familiar to them. This involves improving the ways of their operation. Making changes little by little is called incremental change. But making improvement little by little might not be enough and can pose danger. So, the organisations need to adapt their business to all the bigger changes in environment. If it does not happen, then what happens is called strategic drift. An organisation experiencing strategic drift cannot make radical and strong decisions to adequately deal with all the changes in the environment of business. For avoiding strategic drift, the managers have to fully embrace the changes within the organisation. This requires building of a responsive organisation. Source: Embracing and pursuing change, The Times 100, 2007 The most significant change to the strategy of a firm occurs at the strategic perimeter of the firm. This is the zone of development of new types of capabilities, engagement of new clients, penetration of new markets and experimental observations. Managing the strategic perimeter by the firm determines the consequences ultimately, be it productive innovation or costly strategic drift. A strategic plan should never be considered as a concrete device. Every strategy is based on certain expectations and assumptions and is developed with a limited amount of factual information (Afuah, 2009, p.15). It entirely depends on the organisation as to how it deals with the changing environment and its impact on strategic plan that will determine the amount of drift to be suffered by the strategy. Ways to avoid strategic drift Johnson & Johnson have been actively adapting to all the necessary changes in the business environment. It generally does not face the situation of strategic drift which is reflected from its strong holding in market. So, the medium sized business should also keep itself ready to implement changes in its business operation as its major competitor, Johnson & Johnson is also acting accordingly. However, avoiding strategic drift requires a disciplined approach of implementing the strategic plan, adapting the plan to changing needs and a degree of flexibility. It is typical that if the strategic plan requires great deal of change in organisation, a team or an individual charged with change management need to be assigned to oversee the implementation of plan. This is a point where drift can set in. Watching the progress of change along the timeliness of Gant chart is similar to watching a car crash in slow motion. It is inevitable that the outcome cannot be really effected rather the effect of impact can only be managed. Therefore, the key ingredient is the requirement for change leadership (Hill & Jones, 2007, p.20). Change leadership involves observing the progress of plan, assessment of external and internal factors, changing business environment and application of the new information to the adjustment of strategy. The difference between a manager and a leader is the decision making power. The decision can be to change the strategic plan to accommodate the new reality, calling the interested parties to discuss the impact of external event on plan and initiating a process to rewrite the plan. The change leader should be the person who has the ability of analysing the situation and making decision supported by the board of management. Role of administrative management in implementing strategic change in organisation Strategic management is viewed as the set of actions and decisions resulting in implementation, formulation and control of plans designed to achieve the mission, vision and strategy of an organization and strategic objectives within the business environment where it operates. Strategy implementation forms an integral component of strategic management process. It is a process of turning the formulated strategy into a series of actions ensuring successful accomplishment of mission, vision, strategy and strategic objective of organisation. Strategy implementation has been considered the key requirement of superior business performance rather than strategy formulation. In fact, research has shown that important problems lying in the field of strategic management is not related to formulation of strategy, rather to implementation of strategy. The high rate of failure in organisational initiatives in a dynamic business environment is due to the poor implementation of new strategies (Hill & Jones, 2007, p.10). The role of administrative management is very vital in implementing strategy in the organisation. The administrative management of Johnson & Johnson have been acting effectively in implementing strategic change in organisation. The key driver of effective strategy implementation is strategic leadership. The administrative management apply the role of strategic leadership for effective implementation of strategy within the organisation. Strategic leadership is defined as the ability of leader to envision, anticipate and maintain flexibility for empowering others to create strategic change as required. Strategic leadership is multifunctional which involves managing through others and helping the organisation to cope with change in the globalised business environment (Hill & Jones, 2009, p.24). It requires the ability to integrate and accommodate both the external and internal business environment of organisation, engaging and managing in complex information processing. However there are certain functions which are executed by the administrative management of J&J for ensuring effective implementation of strategy within the organisation. These include establishing balanced organisational controls, determining strategic direction, emphasizing ethical practices, sustaining an effective organisational culture and managing the resource portfolio of organisation effectively. The administrative management of medium sized business should also take the initiative to make effective implementation of strategic change in organisation. The administrative management should act as the implementers of strategies developed within the organisation. They should act as the relationship manager in strategic change management. They can contribute to the competitive advantage of company. 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