Business Strategies - Essay Example

Business Strategies Business strategies are the s of action adopted by a firm for each of its business separately to serve identified customer groups and provide value to the customer groups and provide value to the customer by a satisfaction of their needs. In the process the firm uses its competencies to gain sustain and enhance its strategic or competitive advantage. The source of competitive advantage for any business operating in an industry arises from the skillful use of its core competences. A combination of organizational behavior and resources ultimately leads to the development of capabilities that a firm used to build competencies. These competencies are used to gain a competitive advantage against rivals in an industry. Competitive advantage results in above average returns to the company. Businesses need a set of strategies to secure competitive advantage. The concept of strategies is not consensual in nature and has significantly evolved during the past decades, influencing the development of business strategy theories. In literature, it is usually considered that one can distinguish four main theoretical approaches to business strategies (Whittington, R, (2002), what is strategy and does it matter London: Thomson Learning). These business strategy theories can be grouped into four main approaches: 1. Classical; 2. Evolutionary; 3. Processualist; and 4. Systemic. The main thinkers associated with these four main approaches are the following: - Classical-Chandler, Ansoff, Porter; Processualist- Cyert & March, Mintzberg, Pettigrew; Evolitionary- Hannan & Freeman, Williamsons; Systemic-Granovetter, Whitley. The classical approach emerged in 1960's through empirical researches. It is based on formal rational planning methods designed to maximize long term profitability. This approach is very much influenced by economics (for strategy formulation) and military strategy (for strategy implementation). Porter (1985) is probably the most prominent author within classical approach basically based on the assumption of five forces model. The processualist theories, which have resource based strategy theories as he most important branch, based on the assumptions that rational planning may not be that much effective because the processes of organizations and markets are rarely perfect. According to Mintzberg (1998), strategy emerges from a pragmatic process of learning and adaptation. |in fact, the focus of this approach is the enterprises internal resources and their capacity to generate the firms' competitive advantage. This implies that strategy is all about long term construction and consolidation of distinctive internal competences. In the same way evolutionary strategies theories during 1980's state that environment is normally unpredictable to anticipate effectively and hence future oriented planning becomes unrealistic. It is the market which makes the important choice not the managers as established by the classical approach. For long term survival basically depends on best strategy which concentrates on maximizing chances of survival. The only real comparative advantage is relative efficiency; hence managers must concentrate on cost leadership. In 1990's the systemic approach emerges, taking the relativist position and considering that the objectives and practices of strategy depends on the cultures and powers of the respective local systems. Strategies may pursue objectives other than profit maximization if their social background frames other interests for them (e.g. personnel pride, managerial power, excellence). In this view, the parameters that guide strategy drive not so much from human cognitive bounds as from the cultural rules of the local society. As a result companies from different systems have different strategies i.e. strategies vary according to socio-political-economic systems & geographical locations. Almost all the strategies basically focus on private organizations and on competitive markets and consider profit maximization as their ultimate aim of strategy implementation. Now looking at various strategy concepts, we can distinguish the content of strategy (i.e. what are the issues recognized as 'strategic') and the processes of strategy formation (i.e. how the content of strategy evolves). In practice, such a division is only partly meaningful because it is rather difficult to distinguish these two aspects of strategy. Now we will basically discuss the first two approaches i.e. classical & processualist approaches in which the main thinkers are Porter and Mintzberg respectively. Michael E. Porter is credited with extensive pioneering work in the area of business strategies or which he calls, competitive strategies. He is considered a major proponent of classical approach of strategy thought. He believes that the basic unit of analysis for understanding competition is the industry, which is a group of competitors producing products or services that competes directly with each other. It is the industry where competitive advantage is ultimately won or lost. Through competitive strategy, the firms attempt to define and establish an approach the complete in their industry. The dynamic factors that determine the choice of a competitive strategy, according to Porter, are two, namely, the industrial structure and the positioning of a firm in the industry. Industry structure, according to Porter, is determined by the competitive forces. These forces are five in number: the threat of new entrants; the threat of substitute products or services, the bargaining power of suppliers, the bargaining power of buyers and the rivalry among the existing competitors in an industry. Using the five forces model of industry competition, a firm can analyze its critical strengths and weaknesses, its position within the industry, the areas where strategic changes may yield the maximum profits and the significant opportunities and threats, now it is sufficient to say that every industry has a unique structure and these factors determine the long term profitability of firms in an industry. The second factor that determines the choice of a competitive strategy of a firm is its positioning within the industry. Porter explains that the positioning as the firm's overall approach to competing. It is designed to gain sustainable competitive advantage and is based on two variables: the competitive advantage and the competitive scope. Competitive advantage can arise due to two factors: lower cost and differentiation. Competitive scope can be in terms of two factors: broad target and narrow target. What these approaches show is that there is an overall approach to competing within an industry which is adopted consciously by a firm. These approaches are termed as the two generic types of competitive advantages that a firm could plan for: the lower cost approach and the differentiation approach. According to Porter, lower cost is based on the competence of a firm to design, produce and market a comparable product more efficiently than its competitors. Differentiation is the competence of the firm to provide unique and superior value to the buyer in terms of product quality, special features or after services sales. The other factor is the competitive scope which Porter defines as the breadth of a firm's target within its industry. By the breadth of a firm's target is meant the range of products, distribution channels to employ the geographical area to serve, porter claims that organizations need to make choices that avoid having strategies which are based neither on differentiation nor on cost leadership. The need for distinct generic strategy and the dangers of being stuck in the middle are emphasized. Whilst porter's framework has been widely adopted in the teaching of strategic management and inspired many research frameworks it is the subject of critical debate. While researchers use cost and differentiation as ways of classifying strategy and have investigated the merits of both in delivering competitive advantage. Presence or absence of specialization in competitive strategy cannot explain performance in many cases. Mixed designs may be appropriate under some condition. Campbell-Hunt (2000) suggests that differentiation can take on a number of forms and can be based on marketing variables, sales variables, quality reputation variables and product innovation variables. The advocates of resource-based explanation of competitive advantage have criticized the static nature of Porter's framework with its emphasis on market positioning. They argue that superior performance can be better explained by recognizing that differences in firm resource endowments can explain differences in the nature and costs of output. An organization's ability to succeed in a business arena depends on its ability to develop a market position that is supported by appropriate assets and capabilities. In an industry all successful firms must be able to do something well. They must have competences and resources that allow them to meet the needs of their customers and must be able to identify and occupy an attractive market position meet the needs of a significant segment. Campbell et al. (1995) emphasized that different market have different critical success factors and that a potential problem for corporate managers is that an understanding of critical success factor in one industry may lead them to wrongly believed that the same success factor apply elsewhere. Apart from Porter, Chandler (1969) also found that as the companies grew in turnover, employee numbers, geographical areas served, number of products sold or manufactured, needed solution to complex growth on a number of dimensions expansion by volume, geographical dispersion, vertical integration. Chandler noted that as strategy developed, successful organization developed structures that supported its implementation. Most Big Biotech companies have opted for the second model, since their more-targeted products are best delivered in smaller organizations. The main job title in marketing management (consistent throughout the industry) is product manager. A product manager's responsibilities fall into two main categories, management and administration. The product manager must develop and manage the short term product strategy and marketing plans for assigned products, oversee development of business plans, specify the positioning of a product among its competitors, monitor those competitors' products, acquire both a quantitative and intuitive feel for customer needs, and act as an in-house champion for a product or brand. Administratively, product managers must develop budgets, maintain records of expenses, and manage and develop entry-level support staff (e.g., market research analysts, marketing associates, undergraduate interns and co-op students, etc.). In the next approach i.e. Processualist based on rational planning, believes that strategy creation comes before strategy implementation. This approach develops strategy out of careful analysis and planning. Early strategic planning models assumed that strategies could be developed in situations of complete knowledge, where the environment could be fully comprehended so that the strategic plan could be made with certainty. Experience and research have shown, however that these expectations were frequently not realized. Mintzberg and his coworkers investigated strategy formation over an extended time period using case studies (Mintzberg & Waters, 1982; Mintzberg & Mc Huge, 1985) and they concluded that strategy had deliberate and emergent characteristics. They were seen to range from completely planned strategies, with managers in total control through umbrella and process strategies where managers have some control, to impose strategies with managers having no control. Their analysis also suggested that strategy development had the following eight features and development characteristics. Planned strategies assume that deliberate strategies can emerge from plans developed. by central leadership; entrepreneurial strategy occur when strategy is formed and led by an organizational leader; Ideological strategies occurs when all members are dedicated to a common cause; umbrella strategies occur when Sr. managers defines strategic boundaries; process strategies occur when organization leaders design their processes and systems; unconnected strategies occur when actors within organization follow their own desire; consensus strategies occur when mutually adjust through consistent tradeoffs, with the strategies emerging from consensus; imposed strategies originates outside the organization through the explicit imposition of the wishes of outside bodies. Some big pharmaceutical companies always adopt strategic planning and adopt lean organizational structure to succeed. Most Big Pharma companies are functionally integrated. They have traditional hierarchies, with executive vice presidents in each main area -- R&D, sales, marketing, manufacturing, administration, and human resources. The largest pharmaceutical company in the world, Pfizer, is currently organized by functional area. An important component of marketing strategy is to expand the reach of a successful drug -- obtain approval for new indications, create combination formulas with other drugs to extend the patent protection period, or create new dosage and delivery mechanisms. The underlying purpose is to sell the product to as many patients as possible. Sales forces are aggressive, competitive, and highly polished. The culture of these marketing-driven organizations reflects their primary business model. Marketing people get involved early in product development teams and influence what products do come to market. In April 2005, Pfizer announced a major restructuring, which should yield savings in operations of several billion dollars over the next few years. Later in 2005, Pfizer announced it would not reduce its massive sales force, suggesting that the existing force will have to be re-deployed to create more value per rep. At mid-decade, traditional Big Pharma sales forces are being slowly transitioned into forces that promote drugs that are targeted at smaller patient populations and with a narrower profile of approved indications -- in other words, into specialty reps. Many biotech companies and some Big Pharma ones (e.g., Johnson & Johnson, Novartis, Genzyme) have organized their pharmaceutical units around therapeutic specialty areas, each with their own sales forces and profit centers. Essentially the "Oncology Group" or the "Respiratory Therapy Group" is mini-businesses, and sales reps focus only on products in their group. In such cases, target patient groups are substantially smaller than for the mass-marketed drugs. Here, the group has the feel of a small business, and there is a greater chance to learn about all aspects of launching a drug faster than in a traditional company. A culture is more collaborative, less overtly aggressive, and places a greater premium on building and maintaining relationships. Big Pharma companies merging into mega-companies (e.g., Pfizer acquired both Warner-Lambert and Pharmacia to become the largest company in the industry), some companies have opted to organize therapeutic areas and their associated products into separate business units. But Lenz and Lyles (1985) have criticized excessively rational planning processes on the basis of studies carried out in financial and commercial organizations. They found that some strategic planning model treated the world of business and commerce as if it was easily reducible to predictable outcomes, disregarding managerial experience and ignored all data that could not be quantifies. Ansoff (1987) ascribes the failure of many strategic planning initiatives to the inability of organization to sustain then once the initial enthusiasm has worn off. These are three main reasons why strategic planning fails (Ansoff, 1987, p. 196): Paralysis by analysis, organizational resistance and withdrawal of forceful support for strategic planning by top management. Porter (1987) attributes the failure of many strategic planning exercises to a lack of strategic thinking; He lays the blend for this in the separation of planning from action. Now an important consideration when discussing strategy development is the nature of the power balance within organizations. When organization have structures in which the strategic apex has considerable power strategy development is more likely to be centrally guided correspondingly, when power is dispersed evenly through organization strategy development is likely to emerge from various parts of the organization. Strategy modes that involve the whole organization are likely to reproduce more effective strategies than those that do not. The rational mode with its emphasis on decision control can be associated with financial performance and profitability. As the organizations become more complex the strategy making processes must match that complexity with more people becoming involved in the process (Ansoff, 1987). The view that structure influences strategy is also well established within the strategic management literature. Miller (1986) argues that there are particular structural configurations associated with particular strategy. In competitive environment for example certain configuration of strategy and structure confer superior performance, and organizations which fail to move towards these configurations tend to ultimately perish. The idea of different strategy making configurations offers the possibility that in different organizations different people will have different roles in strategy development and that strategy can be developed with in as well as at top of organizations. There is also the possibility that different decisions will also be made by different process-sp it has been established fact the most of the organizations adopting hybrid strategies according to their own specialty, benefits market structure & organizational capabilities and structures. References: 1. Ansoff, H. I., 1987 Corporate Strategy (Revised Edition), Penguin, London. 2. Campbell, A. and Hunt, C. 2000, what we have learned about generic competitive strategy A meta-analysis, Strategic Management Journal, vol. 21. 3. Campbell, A., Goold, M. and Alexander, M. 1995, The Quest For Parenting Advantage, Harvard Business Review, March-April. 4. Chandler, A.D. 1969, Strategy and Structure, paperback edition, MIT, Boston, Massachusetts. 5. Lenz, R.T. and Lyles, M. 1985, Paralysis by Analysis: is your planning system becoming too rational, Long Range Planning, Vol. 18, August. 6. Miller, D. 1986, Configurations of Strategy and Structure: Towards A Synthesis, Strategic Management Journal, Vol. 7, No. 3. 7. Mintzberg, H., Ahlstrand, B., and Lampel, J., 1998, Strategy Safari: A Guided Tour through the Wilds of Strategic Management, Free Press. 8. Mintzberg, H. AND Mchuge, M. 1985, Strategy Formation in an Adhocracy, Administrative Science Quarterly, Vol.30. 9. Mintzberg, H. AND Waters, J.A. 1982, Tracking Strategy in an Entrepreneurial Firm, Academy Of Management Journal, Vol. 25. 10. Porter, M.E. From Competitive Advantage to Corporate Strategy, Harvard Business Review, May/June 1987, pp 43-59. 11. Porter, M. E., 1985, Competitive Advantage, Ch. 1, pp 11-15. The Free Press. New York. Read More