The Models or Schools Of Thought to the Management of Business Strategy - Essay Example

Comparison among Business Strategy Models Introduction The success of a business is first and foremost dependent on the strategy it chooses to adopt. A well formulated business strategy identifies the long-term corporate goals, and matches the internal capabilities of the firm with the opportunities and risks in the competitive environment in order to attain these goals (Verbeke, 2013). There are a number of theoretical models devised by experts to provide a guide for business strategists in formulating the best possible strategy for their firm. Some are eternally driven, some internally, and some combine features of both. Externally driven strategies The strategic models during the 1980s were predominantly premised upon factors external to the organisation. They pertained to elements in the business environment which shaped the manner in which the corporation responded. The advantage of these strategies is that they are market-oriented and therefore are keen to capture opportunities and avoid threats; however, they largely ignore or overlook the internal resources and capabilities of the company and its strengths and weaknesses. As a result, the strategic plans are not always feasible for the company to implement, or the firm may be ill-equipped or their personnel ill-trained to properly execute it. Among the strategic models dependent upon external factors are the following: Porter’s 5-forces Competitive Model Source: Drawpack.com Porter’s model focuses on five forces (shown in the figure above) that are external to the firm but internal to the industry to which it belongs. The stronger these forces are, the more limited a firm is in building profits; on the other, weak forces indicate that there are more opportunities to earn profits. Over time, the strength of each of the forces may change, together with changing industry conditions. It is the manager’s task to take cognizance of these risks and opportunities, and to formulate an appropriate strategy in response to these forces (Hill & Jones, 2009). Porter’s Generic Strategies Each of the generic strategies adopts a fundamentally different approach in “creating, sustaining, and combining a firm’s competitive advantage” and deciding on what its specific target shall be (Hwy-chang, 2010:9). The clear-cut distinctions the model makes among the strategies tend to be simplistic and misleading, because a cost leader cannot ignore the basis of differentiation – that is, the cost leader must at least achieve parity or proximity on the basis of differentiation as its competitors for it to realise an advantage over them in cost. Conversely, the firm relying on differentiation must attain a cost structure at parity or proximity to its competitors, by reigning in costs that do not impact on differentiation (Hwy-change, 2010). Source: Drawpack.com Boston Consulting Group Matrix Otherwise known as the “BCG Matrix” or “Growth-share Matrix,” this strategic model is based on two parameters – business growth (i.e., the growth of the industry of which the business is a part), and market share (i.e. the proportion of the total market demand that the business has captured). The four categories to which business are divided are shown in the figure below. This model is helpful in planning cash flows (Enz, 2010). However, the BCG matrix makes the erroneous assumption that businesses with high market shares lead to high profitability, but in many cases even firms with low market share have high profitability. Moreover, some high-market-share businesses may even be operating at a less efficient level than those with low market shares, when their costs of doing business goes high and market prices are not able to rise as fast. Source: Drawpack.com The Ansoff Matrix Source: Drawpack.com The Ansoff matrix categorizes strategies on the bases of two dimensions: products (i.e, what good or service is sold); and markets (i.e., who the good or service is sold to), whether they are already existing or potential. The Ansoff matrix may be used in conjunction with the BCG matrix to arrive at a product mix that supports the chosen strategy; however, it is not indicated in either matrix that there is another choice, that is to either withdraw a product from the product range of the business, or withdraw the business from a particular market (Stone, 2001). The matrix fixates upon limiting the choice of alternatives to four, when there are actually six (including withdrawal of product or from market). Internally driven strategies Later developments in formulation of business strategy models showed interest in the role of factors internal to the firm as the foundation for its choice of strategy (Grant, 1991). Rather than look to the external competitive market environment, internally driven strategies look to the resources, structures and processes of the organisations to understand and enhance its capabilities to be more cost efficient, productive, and thereby realise competitive advantages. Generally these models tend to overlook the influence of external forces that shape business strategy. The main criticism of internally driven strategies is its lack of orientation with the demands of the market (Mathur & Kenyon, 2008). Porter’s Value Chain Source: Drawpack.com Porter conceived of the value chain as the key operational activities that contribute to a cumulative build-up of added value for the customer. The end result created by the value chain is greater than the sum of its parts, which directly translates to sider profit margins for the business. There are primary activities which contribute directly to the value of the operations, and support activities which enable the primary activities. Added value is also derived from the linkages. The concept of the value chain has been criticised for focusing attention on improving existing resources and the linkages between them, but ignores external resources that may be acquired and which may appropriately be the solution sought for (Needle, 2010). Wheel of Competitive Strategy Source: Drawpack.com The wheel of competitive strategy is a tool for articulating key aspects of a firm’s competitive strategy. It is conceptualised in the form of a wheel with the organisational elements arranged as spokes emanating from hub. Situated in the hub are the company’s goals which unite the workings of the organisational elements. The spokes must be connected with each other and with the hub or the wheel will not work at all (Proctor, 2000). In the setting of the boundaries of the spokes – i.e. the limitations of internal policies governing these elements – the environmental limitations are considered, although they are not specified and are only implicit in the model. Resource Based View The resource-based view of the firm holds that corporate resources play a vital role in determining the industrial and geographical boundaries of the firm’s activities. It explores the “relationships between resources, competition, and profitability, including the analysis of competitive imitation, the appropriability of returns to innovation, the role of imperfect information in creating profitability differences between competing firms, and the means by which the process of resource accumulation can sustain competitive advantage” (Grant, 1991, pp.114-115). The resource-based view merely emphasises the resources, i.e. inputs into the production process, that a firm possesses. Inputs, however, are different from capabilities, and the theory presumes that inputs are synonymous with capabilities. On their own, resources are seldom productive, because ‘productive activity requires the cooperation and coordination of teams of resources’ (Grant, 1991, p. 119). Resources are not the same as capabilities, although they may form the bases of such capabilities which in turn become the source of competitive advantage. http://www.emeraldinsight.com/content_images/fig/0030270502004.png McKinsey 7-S Framework Source: Drawpack.com McKinsey’s 7-S framework was developed by McKinsey Company, a US management consultancy firm. The framework relies on the complex relationships among strategy, structure, systems, shared values, skills, staff and (leadership) style. When these relationships are balanced and harmonised, then the organisation is able to function at its best. The development of strategy in the organisation should aim to create the alignment and harmony among these 7 S’s (Sekhar, 2009). The model’s limitation is that when one of the parts of the model is changed, all other parts are changed because the balance is disrupted. In a competitive and constantly changing environment, the delicate balance necessitated by the 7-S model can expect to be often disrupted. The model lacks robustness to be truly competitive. Externally & internally driven strategies200 There are strategies that seek to combine the best of both internal and external bases for strategy formulation. These models take into account external market forces and internal operations in strategy formulation. Product Life Cycle The PLC model attempts to identify and characterise stages in the development of the history of a product based on its performance in the market (Niemann, et al., 2009; Stark, 2011, Yang, 2007). The basis for determining the life cycle is the product’s sales and market share. While the model enhances planning and takes a proactive approach towards creating products for the market, identification of the four (other versions identify five) stage of the PLC is often difficult to gauge and is generally unreliable, and abiding mainly by this strategy may cause planners to be mistaken in their assessment. Sales figures rise and fall with cycles and is influenced by economic volatilities, so a drop in sales may be mistaken as the beginning of decline (Gintner, 2013; Soenen & Oiling, 2003). Source: Drawpack.com SWOT Analysis Diagram The SWOT (i.e. Strengths, Weaknesses, Opportunities & Threats) model is one of the more popular tools of strategic planning because it is easy and expedient for practitioners to use. It directs attention to the threats and opportunities existing in the environment, and how a firm may address them with its strengths and weaknesses. However, the appreciation of these four elements is largely dependent upon the perception of the analyst, thus an incorrect evaluation is always a possibility. The identification of internal and external forces may be adversely affected by superficial data gathering, oversimplification of analysis, lack of knowledge of the market situation or the industry, and other similar factors (Pahl & Richter, 2007). Source: Drawpack.com Conclusion The foregoing are but a few of a great many business strategic management models that have been developed through the years. Since the models are theoretical representation of the workings of the highly complex business organisations, there are necessarily limitations to their use, and often it is advantageous and customary to combine several models in an actual strategy analysis for an existing business. Persistent advantages and disadvantageous are evident among groups of models, particularly when distinguished according to their bases. Strategic models constructed according to external factor considerations are market-oriented and environment-situated, but overlook internal company capabilities and resources. On the other hand, strategic models crafted around internal resources and processes may fail to account for effectiveness in the actual environment and do not address market contingencies. A careful combination of both considerations, either in one model but preferably in the judicious use of several models, should be undertaken by top management before formulating a strategy for their firm. References Enz, CA 2010 Hospitality Strategic Management: Concepts and Cases, 2nd edition. Hoboken, NJ: John Wiley & Sons, Inc. Gintner, PM 2013 The Strategic Management of Health Care Organisations, 7th edition. Hoboken, NJ: John Wiley & Sons, Inc. Grant, RM 1991 ‘The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation.’ California Management Review. Spring, pp.114-135 Hill, C & Jones, G Strategic Management Theory: An Integrated Approach. Mason, OH: South-Western Cengage Learning Hwy-Chang, M 2010 Global Business Strategy: Asian Perspective. London: World Scientific Publishing Co. Pte. Ltd. Mathur, S & Kenyon, A 2008 Creating Valuable Business Strategies. Oxford: Butterworth-Heinemann Needle, D 2010 Business in Context: An Introduction to Business and Its Environment, 5th edition. Andover, Hampshire: South-Western Cengage Learning Niemann, J; Tichkiewitch, S; & Westkämper, E 2009 Design of Sustainable Product Life Cycles. Springer-Verlag Berlin Heildererg Pahl, N & Richter, A 2007 SWOT Analysis – Idea, Methodology, and a Practical Approach. Nordersted: GRIN Verlag, Proctor, T 2000 Strategic Management: An Introduction, 2nd edition. Abingdon, Oxon: Routledge Sekhar, GVS 2010 Business Policy and Strategic Management. New Delhi: I.K. International Publishing House Pvt. Ltd. Soenen, R & Oiling, G 2003 Feature Based Product Life-Cycle Modelling. Norwell, Massachusetts: Kluwer Academic Publishers. Stark, J 2011 Product Lifecycle Management: 21st Century Paradigm for Product Realisation, 2nd edition. Springer-Verlag London Limited Stone, P 2001 Make Marketing Work for You. Oxford: How To Books Ltd. Verbeke, A 2013 International Business Strategy. Cambridge University Press. Yang, G 2007 Life Cycle Reliability Engineering. Hoboken, NJ: John Wiley & Sons, Inc. Read More