Strategic Groups and Contribution to Industry Profitability - Essay Example

Strategic Groups and Contribution to Industry Profitability Q.1 Strategic groups Profitability within organisations can be understood from different levels; firms, industries or even resources. Industry-wide analyses like Porter’s five forces are insufficient to explain competitive behaviour or outcomes because certain businesses may be in one industry but do not compete with another (Kumar and Subramanian, 2010). These institutions are said to belong to the same strategic group, and often compete with each other directly; a case in point is a luxury restaurant within a five-star hotel and a fast food chain restaurant. Both institutions may belong to the same industry but do not compete directly with another, so the factors that affect either of them may not be critical in their success; instead, organisations within similar strategic groups ought to be considered (Amel and Froeb, 1991). In essence, a strategic group may be understood as a collection of firms that utilise common strategies and operate within common competitive environments. Membership within this entity determines the threats and opportunities that organisations are susceptible to as well as other components of their competitive environments. Knowledge of such information is critical in understanding why some strategic groups perform better than others and why firms cannot move between groups easily. The concept of mobility barriers captures the above changes; this term is analogous to entry barriers because it prevents companies from changing from less profitable strategic groups to ones that are more profitable. High mobility barriers in a strategic group assist in cementing positions of high performance for certain organisations, and shield them from intense rivalry by new ones (Hill and Deeds, 1996). One way of understanding how strategic groups contribute to industry profitability is through an analysis of the motor vehicle market; a highly traditional yet technology-dependent industry. Organisations like Jaguar, Land Rover and Rolls Royce initially had vertically integrated business models. These companies operated within similar strategic groups where they took advantage of economies of scale as well as specialisation in order to maintain competitive advantage. Even collusion between them was common because they were not overly concerned about production costs; however, these dynamics altered upon arrival of Japanese firms (Noel and Eduardo, 2007). The new entrants did not place too much emphasis on vertical integration; instead, they preferred to forge close associations with their contractors. A process that made them stand out was just in time manufacturing, which focused on efficient production through low inventory as well as flexibility. High quality products and efficiency in energy or fuel use was a factor that was highly in demand at the time, and the Japanese automakers rose to the occasion. The companies were able to outperform older veterans and have even caused some traditionally high-performing firms to close shop in the UK. One may say that the older companies were unable to respond to a new strategic group because they lacked the capabilities or resources needed to overcome mobility barriers. Most of them belonged to one of two strategic groups; a highly vertically integrated and low product-market scope group or a highly vertically integrated and high product-market scope strategic group. On the other hand, the Japanese sellers created a new group that had low vertical integration and high product market scope. Similarities between organisations in the same strategic groups have prevented them from attacking the Japanese automakers; those similarities have now become mobility barriers for them. In essence, this case analysis indicates that difference between strategic groups must be so intense that members from the worst -performing strategic groups ought not to be able to invade the ones in better-performing groups (Brush, Bromiley and Hendrickx, 1999). The illustration also shows that mobility barriers between strategic groups exist only when resources are divergent between firms in the industry. A strategic group analysis considering resource differences allows stakeholders to understand why differences between strategic groups may continue for a long time. If all firms were endowed with similar resources, it would have been relatively easy for entities from different strategic groups to compete with one another thus eliminating the advantage that one entity had over the other. Analysts often say that history matters, so companies that were first movers in an industry can have strategic assets that are difficult to imitate. The method of analysis that differentiates companies on the basis of strategy assist one in understanding how certain structural forces make organisations more profitable than others. For instance, the level of specialisation prevalent in groups enables one to delineate high-performing ones from the not-so promising ones. Specialisation can involve having product lines that are very wide or narrow or may entail focusing on specific geographic markets within the industry. Alternatively, the phenomenon may involve targeting specific customer segments such as the health-conscious consumers in the packaged food industry (Budayan, Dikemn and Birgonul, 2011). In other instances, strategic groups can be classified based on their product quality or even their technology leadership, and this assists in knowing how such factors give them competitive advantage. Sometimes some organisations use raw materials that are more effective while others prefer to focus on durability or certain product specifications. First movers with regard to a certain type of technology can form a strategic group while those who always employ imitation strategies can also belong to another category (Pereira-Moliner, Claver-Cortes and Molina-Azorin, 2011). In conclusion, analysts can employ any of the above factors to understand how firms differ from each other within a specific industry. Having knowledge of the intra-industry forces that make companies so different from each other is crucial in management studies. This aspect illustrates why some companies belong to similar industries but barely compete with one another or are less profitable. Q.2 Capability and core competence Core competences refer to those specialised areas within an entire organisation that enable it to harmonise work processes as well as technologies; this often causes the company to outperform other competitors. Conversely, capabilities refer to those things that are needed in order to implement a particular strategy, and may include technology and processes. However, the key difference between the two is that capabilities mostly focus on specific purposes while competences dwell on an entire strategy for the firm (Warren, 2002). Competencies are more holistic in nature than capabilities because they have to be applied across several business units, yet the same is not true for capabilities; the latter mostly apply to smaller subunits and often treated as local. Additionally, the level of application of capabilities is dramatically different from competencies since capabilities mostly deal with performance in specific activities. On the other hand, competencies are often created in order to tackle a series of activities, so they may span across a wide range of processes. It is for this reason that one may find a series of capabilities in the same organisation while the same is not true for competences as these are likely to be few in number. The latter divergence in numbers is mostly due to differences in the ease with which capabilities can be altered as competences tend to have a long-term orientation (Schoemaker, 2010). Knowledge about core competencies and capabilities is essential in assisting organisations to know how they can expand their reach across various markets. It can also cause them to prioritise consumer benefits because core competencies are supposed to boost the value created for the end product. This also gives firms a basis upon which to leverage their resources; they can learn how to effectively accumulate or safeguard what they have. Organisations that have sustainable competitive advantage often endeavour to learn new things about themselves, and knowledge of the core competencies and capabilities often assists in determining these factors. For instance, an organization like Apple is well known for its frequent inventions; this arises from its understanding of technology as a core competence for the company. The strategy has created a first mover advantage within the smart phone industry and has constantly pushed other organisations to play catch up (Posen, Lee and Sangyoon, 2012). In certain instances, core competences may not relate to actual production processes, but may cover services offered at the end of production. Here, if the sales force for a certain organisation is doing an impressive job, then their overall outcomes will be more satisfactory and could boost profitability. Therefore, having sufficient knowledge about core competences at the execution level can cement relationships and outcomes in the market. In conclusion, if a company has thorough knowledge of their core competencies and capabilities, they are likely to execute their processes effectively and efficiently. This raises the standards that are ascribed to their products and thus ensures that results are always satisfactory to the team or group concerned. Sometimes these could come in the form of skills or could be manifested in the form of management capabilities as well as certain objectives like consumer satisfaction. Q.3 Mergers vs. Strategic alliance A merger refers to a union in which two organisations come together and decide to become one entity; the previous firms will dissolve and a new company will be put in place. Conversely, a strategic alliance is an arrangement in which two companies share resources, processes and core strengths or capabilities without committing to a long-term relationship. Both companies often maintain their identities, control and ownership over their assets as the cooperation continues to take place. Mergers are an important way of reconfiguring a company’s arrangements or value chains especially through expansion of current businesses or lines. Organisations that exist in new and growing industries are likely to benefit most from mergers, as the external environment will not penalise them for new changes. Furthermore, poorly performing firms that merge with high performers are likely to enjoy greater shareholder value at the end of the day (Lorange and Roos, 1992). The best way in which a strategic alliance benefits an organisation is that it rarely diminishes value, but puts a firm in a position where it can harness assets and capabilities from another one. For companies that operate in highly uncertain industries such as IT firms, alliances seem to be more appropriate then mergers as they do not tie down companies to each other especially when needs have changed. Additionally, strategic alliances add value by allowing companies to have numerous partners that complement what the other firms cannot offer. In this type of arrangements, risks of share value are lower because the deal does not involve buying and selling the organisation, as the case is in an acquisition. Many strategic alliances tend to do relatively well in comparison to mergers because of their simplicity and the non-committal nature of the deal. They allow companies to leverage on certain characteristics without paying a premium for a more permanent solution. This is especially true for those institutions that deal with intangible materials like service provision, television production or software development (Johnson, 2012). Risks are inherent in mergers when the pre-merger agreement is not clear; sometimes some companies may not clearly specify which of the two firms will control the integration process, so it falls into disarray. Additionally, a merger could be a problem if the synergies in the union would have been better met through another form of an alliance such as a joint venture. Alternatively, issues to do with power struggles may ensue between members of the different teams as some may feel threatened by the others. The problem of losing shareholder value is a big one for merging firms, as they may not realise the value they had set out to achieve. For shareholders, mergers could be a challenge because sometimes they are perceived as risky initiatives that minimise market capitalisation and yield minimal returns. If a company merges with another that has nothing to do with its previous line of activities or destroys healthier portfolios, then it will not enjoy maximum outcomes. Conversely, strategic alliances also have their own set of risks with the biggest challenge being that synergies could have minimal impact since combinations of assets are only limited. For this reason, they are likely to limit the range of strategic options available to an institution as everything is going to be underexploited between the two entities. This approach could also be risky owing to the effect it has on managers who may have to divide their attention between their own enterprise as well as the respective alliance they have entered into. Also, in the event that a company wants to sell in the future, it may be difficult for it to come up with a fair and accurate acquisition price after a strategic alliance (Bleeke and Ernst, 1994). Sometimes, a strategic alliance could outlive its purpose / objective and thus lead to redundancies, losses, and frustration for companies concerned. In conclusion, mergers are permanent and long term while strategic alliances are more short sighted and less susceptible to commitment demand. Companies in uncertain environments or those ones that are growing ought to consider strategic alliances while the more mature ones may think of mergers. Overall, it appears strategic alliances are less capital intensive and less risky, so they tend to be preferred over mergers, which can cause losses in share value. References Amel, D. and Froeb, L., 1991. Do Firms Differ Much? The Journal of Industrial Economics, 39, pp. 323-331. Bleeke, J. and Ernst, D., 1994. Collaborating to compete: using strategic alliances and acquisitions in the global marketplace. Chichester : Wiley, 1994. Brush, T.H., Bromiley, P. and M. Hendrickx, 1999. The Relative Influence of Industry and Corporation on Business Segment Performance: an Alternative Estimate. Strategic Management Journal, 20, pp. 519-547. Budayan, C., Dikemn, I. and Birgonul, M., 2011. Hybrid strategic groups in construction. Engineering Project Organisation Journal, 1(3), pp. 183-196. Hill, C.W.L. and Deeds, D. L., 1996. The Importance of Industry Structure for the Determination of Firm Profitability: a Neo-Austrian Perspective. Journal of Management Studies, 33, pp. 429-451. Johnson, G., 2012. Exploring strategy: Text and case. NY: Routledge. Kumar, K. and Subramanian, R., 2010. Porter’s strategic types: Differences in internal processes and their impact on performance. Journal of Applied Business Research, 14(1), p. 15. Lorange, P. and Roos, J., 1992. Strategic alliances: formation, implementation and evolution. Cambridge, Mass: Blackwell, 1992 Noel, H. and Eduardo, G., 2007. How much do strategic groups matter? Brussels: Hogeschool-Universiteit Press. Schoemaker, P., 2010. How to link strategic vision to core capabilities. MIT Sloan Management Review, 3(12), pp. 45-49. Pereira-Moliner, J., Claver-Cortes, E. and Molina-Azorin, J., 2011. Explaining the strategic groups-firm performance relationship: A multilevel approach applied to small and medium-sized hotel companies in Spain. Journal of Small Business Management, 49(3), pp. 411-437. Posen, H., Lee, J. and Sangyoon, Y., 2012. The power of imperfect imitation. Strategic Management Journal, 34(2), pp. 149-164. Warren, K., 2002. Competitive Strategy Dynamics. Chichester: John Wiley & Sons. Read More