Competitive Strategy: Techniques in Analyzing Industries and Competitors - Case Study Example

Strategy is the pattern of resource allocation decisions made throughout an organization. These encapsulate both desired goals and beliefs about whatare acceptable and most critically, unacceptable means for achieving them.” In general, a company’s strategy draws up the game plan management is using to stake out market position, conduct its operations, attract and please customers, compete successfully, and achieve organizational objectives. Crafting, implementing, and executing a strategy are top-priority managerial tasks for two important reasons. First, there is a compelling need for managers to proactively shape how the company’s business will be conducted. It is management’s responsibility to exert strategic leadership and commit the enterprise to going about its business in one fashion rather than another. Second, there is an equally compelling need to mold the efforts and decisions of different divisions, departments, managers, and groups into coordinated, compatible whole. All actions being taken in different parts of the business need to be mutually supportive of the overarching business strategy. It provides the rationale for all business actions and decisions (Thompson & Strickland, 1990). Company strategies cannot be implemented or executed well without a number of support systems for business operations. The information system, nevertheless, may provide support to these business strategies. Every organization needs systems for gathering and storing data, tracking key performance indicators, identifying and diagnosing problems, and reporting strategy-critical information. Timely accurate information, therefore, is an essential guide to decisions and action (Thompson & Strickland, 1990). Furthermore, a number of tools and frameworks have been developed for management used in effectively crafting strategy. We will discuss and critically evaluate further in detail the following frameworks in light of IS/IT Strategic management. The three tools and frameworks that we will discuss in this paper are the following: SWOT Analysis, Value chain analysis, and Porter’s five competing forces model. SWOT Analysis In deciding what projects to pursue, it is important for managers to have a good overview of the firm’s business position. That is, managers need to understand the firm’s resource strengths and weaknesses and its external opportunities and threats to have a clear grasp of the strategic direction to undertake. The SWOT analysis outlines the strengths, weaknesses, opportunities, and threats of the organization. The basic underlying principle of the SWOT analysis is that “strategy-making efforts must aim at producing a good fit between a company’s resource capability (as reflected by industry and competitive conditions, the company’s market opportunities, and specific external threats to the company’s profitability and market standing).” The insights are gained in undertaking the SWOT analysis in terms of identifying the company’s competencies and deficiencies and channeling the firm’s resources in exploiting the market opportunities and further building resources in minimizing the effect of threats against the company’s well-being. Otherwise, crafting strategy without understanding the firm’s competencies and pursuing all market opportunities becomes a risky proposition indeed. SWOT analysis is generally divided into four elements which lists the firm’s general strengths, weaknesses, opportunities and threats. A strength is an asset or an expertise that provides a company enhanced competitiveness. It may come from different sources or forms such as a skill or important expertise, valuable assets (i.e. physical asset, human assets, organizational assets, and intangible assets), competitive capabilities, brand recognition, and alliances and joint ventures. Overall, if a company has core competence valuable in the market and complementary resources at its command, then it would be in a position to succeed (Barney, 1991). On the other hand, a weakness is a state that places a company at a disadvantage in the market. The condition can be due either because of a company lacks a valuable asset that the market values or an expertise that a company does poorly in comparison to competitors. A weakness may or may not necessarily make a company competitively at risk. A weakness generally depends on the how the market values a particular asset or expertise and whether a company’s strengths and resources can overcome the weakness and meet market needs otherwise. (Barney, 1991). Market opportunity often dictates the direction of the company and shapes the company strategy. Without first identifying each company opportunity and appraising its growth potential, managers will not be able to properly tailor strategy to meet the company’s needs. Market opportunities can be abundant or scarce and can range from wildly attractive to marginally interesting (Barney, 1991). In evaluating a company’s market opportunities and ranking their attractiveness, managers have to guard against viewing every industry opportunity as a company opportunity. A company may not be equipped with the necessary resources to pursue successfully each opportunity in the industry. It is generally advisable for companies to choose the market opportunities carefully taking into consideration if the opportunity offers profitable growth, enhance a company’s competitive advantage, and does the success rate of pursuing the opportunity is very high. (Barney, 1991; Wernerfelt, 1984). External threats can come from the entry of new competitors with cheaper or better technologies, new legislations and regulations, changes in the macro-economic environment, possible hostile takeover, demographic shifts in the market, and political disturbances and the like. In general, the degree of adversity imposed by external threat can range from moderate to strong. A strong external threat can make a company’s situation and outlook quite shaky. It is management’s job to identify the threats to the company’s future well-being and to evaluate what strategic actions can be taken to neutralize or lessen its impact (Barney, 1991). The value of the SWOT analysis is its ease of use, its simplicity, and its flexibility. In addition, SWOT analysis allows the synthesis and integration of various types of information which are generally known but still provides the possibility to organize and synthesize recent information as well (Barney, 1991). The insight to be gained in performing the SWOT analysis is the understanding of the core competency of the company that would give it a distinctive competitive advantage over its rival. More importantly, it provides the groundwork on (1) how the company’s strategy can be matched to both its resource capabilities and its market opportunities, and (2) how urgent it is for the company to correct which particular resource deficiency and guard against to particular threats. It also raises questions about what future resource strengths and capabilities the company will need to respond to emerging industry trends and competitive conditions (Barney, 1991). On the other hand, SWOT analysis does have its limitation and drawbacks. First, the length of the lists of factors has to be taken into consideration for the analysis. This means that in order to pursue the market opportunity, a company must be able to identify all the competencies and capabilities that are required in order to succeed in pursuing that opportunity. Second, there is no classification of opportunities from which to base the priority projects which the firm should carry out. At times, there will be disagreements in the general strategy based on the SWOT analysis and there are no suggestions in solving such disagreements. Internal and external factors are also not subject to scrutiny in its validity. Lastly, inadequate definition of internal and external factors exists in SWOT analysis and as a result, this gives ambiguity and vagueness in the overall strategy formulation using the SWOT analysis (Barney, 1991; Wernerfelt, 1984). Value Chain analysis In a competitive market environment, companies must always keep its cost in-check in order to successfully compete. In general, the cost structure between companies varies because of the different initiatives a company undertakes and costs incurred. The cost disparity is justified as long as the products or services of close rivals are sufficiently differentiated. A company with high-cost structure becomes increasingly at risk if its cost exceeds those of close rivals (Wernerfelt, 1984). Therefore, it is imperative that every firm engage in internal cost analysis to stay on top of what its own costs are and how they might be changing. Strategic cost analysis benchmarks the company’s cost structure with rival companies. And, in order to evaluate the cost structure of a company, value chain analysis is the primary analytical tool in identifying the separate activities, functions, and business processes, that are performed in designing, producing, marketing, delivering, and supporting a product or services (Wernerfelt, 1984). Value chain, by definition, are “the primary activities that create value for customers and the related support activities” (Porter 1980). In order to effectively compare cost structure, managers need to disaggregate a company’s operations into strategically relevant activities and business process to expose the major elements of the company’s cost structure. More importantly, accurately assessing a company’s competitiveness in end-use markets requires that company managers understand the entire value chain system for delivering a product or service to end users, not just the company’s own value chain. That is, managers need to understand both their supplier’s value chain and forward channel value chain in order to determine value-added activities for their end-users. Suppliers’ value chain are relevant because suppliers perform activities and incur costs in creating and delivering the purchased inputs used in a company’s own value chain; the cost and quality of these inputs influence a company’s own cost and/or differentiation capabilities. Forward channel value chain, on the other hand, are relevant as well because (1) the costs and margins of downstream companies are part of the price the end user pays and (2) the activities of the forward channel allies perform affect the end user’s satisfaction (Wernerfelt, 1984). The most important application of the value chain analysis is to determine the activities that do not contribute value-added service to its end-users. Identifying the non-value added activities and discontinuing these activities will further improve the cost competitiveness and bottom-line for the company. Furthermore, benchmarking with competitors will provide not only the cost differences, but should also raise questions on improving internal processes of the company. Benchmarking in specific activities also brings to company to adopting “best practices” in the industry and continuously improve on its process. Continuous improvement initiatives would result to more resources freed up and improve productivity and quality. Freed up resources in turn can be used to pursue market opportunities. The drawback of the value chain analysis is that it focuses on the internal processes and does not take into account the environmental factors affecting the company’s competitiveness. While the focal point of value chain analysis is to improve efficiency, reduce cost, and improve competitiveness, value chain analysis can be overly critical to support activities such as human resources, R&D and administrative function which do not provide direct value-added service to the end-users. Moreover, value chain analysis concentrates on physical processes and assets and overlooks other key competencies and valuable assets such as intellectual property, human capital assets, or strong brand name that can contribute to overall success of the company in the market. Porter’s five forces model Michael Porter, a Harvard Business School professor, illustrated the nature of competition in an industry. Competitive pressures on the company do not only come from rival companies but in four other competitive forces as well. Porter identifies the five competitive forces as follows: (1) the rivalry among competing sellers in the industry, (2) the potential entry of new competitors, (3) the market attempts of companies in other industries to win customers over to their own substitute products, (4) the competitive pressures stemming from supplier-seller collaboration and bargaining, and (5) the competitive pressure stemming from seller-buyer collaboration and bargaining (Porter, 1985). The rivalry among competing sellers generally is the strongest among the five competitive forces. Firms compete and jockey for position and buyer’s preference in the market. Generally the intensity of competition is characterized by how vigorously competing sellers employ price cuts, expanded customer service, special promotions, and new product introduction. Two facets of rivalry need to be understood. First, a powerful, successful competitive strategy employed by one rival greatly intensifies the competitive pressures on other rivals. Second, the frequency and vigor with which rivals use any and all competitive weapons at their disposal are major determinants of whether the competitive pressures associated with rivalry are cutthroat, fierce, strong, moderate or weak (Porter, 1980). New Competitors in the marketplace bring new production capacity and supply, and the firm generally desires to gain a foothold in the market and gain market share from existing competing sellers. Barriers to entry and the expected reaction of incumbent firms to new entrants are the two factors should considered by new entrants in the industry. The two factors generally define the gravity of the competitive threat of new entrants in the industry. A barrier to entry exists whenever it is hard for a newcomer to break into the market or economic factors put a potential entrant at a disadvantage relative to its competitors. Examples of barriers to entry include high capital requirements, economies of scale, cost and resource disadvantages independent of size, and learning and experience curve effects (Porter, 1985). In general, sellers do not only compete for position and buyer’s preferences with rival sellers in the marketplace. If good substitutes of the products and services, which a firm offers, exist in the market place, it is understood that firms from another industry are also competing for the market position and buyer’s preference. Firms in one industry are quite often in close competition with firms in another industry because their respective products are good substitutes. Just how strong the competitive pressures are from substitute products depends on three factors: (1) whether attractively priced substitutes are available, (2) whether buyers view the substitutes as being satisfactory in terms of quality, performance, and other relevant attributes, and (3) whether buyers can switch to substitutes easily (Porter, 1985). Whether supplier-seller relationships represent a weak or strong competitive force depends on (1) whether suppliers can exercise sufficient bargaining power to influence the terms and conditions of supply in their favor, and (2) the extent of supplier-seller collaboration in the industry. Similarly, whether seller-buyer relationships represent a weak or strong competitive force depends on (1) whether buyers can exercise sufficient bargaining power to influence the terms and conditions of sale in their favor, and (2) the extent and competitive importance of seller-buyer strategic partnerships in the industry (Porter, 1985). Porter’s five-forces model contribution had been the thoroughness with which it epxposes what competition is like in a given market – the strength of each of the five competitive force, the nature of the competitive pressures comprising each force, and the overall structure of competition. In principle, the collective impact of competitive forces is inversely related to the combined profitability of participants firms. That is, the lower the collective impact of competitive forces, the higher the combined profits of the firms in the market. More importantly, a firm’s competitive strategy can be viewed as effective if it provides a good defense against the five competitive forces, shifts competitive pressures in ways that favor the company and helps create sustainable competitive advantage (Porter, 1985). The drawback of this framework is that it focuses on understanding the nature and the strength of competition in an industry. The framework does not provide a prioritization of projects in terms of allocating resource in building defenses for threats in the marketplace. In addition, external factors cited are not subject to scrutiny in its validity and disagreements may arise on what the strengths of the different forces are exerting on the company (Porter, 1985; Porter, 1980). In conclusion, we believe that the tools and the frameworks used in strategic analysis are useful in crafting overall strategy. We believe that these tools and models should be used in conjunction with other tools for managers to develop the company strategy. For example, it is often helpful to use the PEST analysis and SWOT analysis in conjunction with each other as the insights provided by PEST analysis on the trends in the macro-environment provides inputs as well as further insights into the SWOT analysis. That is, SWOT analysis is enhanced in determining and identifying what opportunities would be best to pursue given the company’s resources and capabilities. Using a variety of tools and models and integrating the facts and insights gained in each would provide a deeper understanding on the firm’s business position and direction that it best pursue. The importance of aligning the information systems and information technology strategies to business strategy cannot be overemphasized (Earl & Feeny, 1995). Moreover, there should be a linkage of global organizational design strategies with techniques for according information technology support (Chismar, 1994). Various structures exert an influence on the way information flows within the firm (Neumann­Alkier, 1997), and information technology is expected to permit firms to undertake business strategies which rely on complicated organizational and decision making processes (Chismar, 1994). The rationale is that in applying a global strategy, the whole firm drafts a specific business model which is supported and enabled by information technology. Along a similar vein, information technology also permits taking advantage of opportunities accorded in enabling global strategies and new infrastructures (Rayport & Sviokla, 1994; Evans & Wurster 1997). Information technology is also a driver of the globalization process through technologies such as the internet and the world wide web, permitting the smallest entity to take advantage of the opportunity to operate on an international scope or scale (Quelch & Klein, 1996). In undertaking expansion and globalization, the firm ought to leverage on these strategic tools to achieve authentic competitive advantage. References Barney, J. (1991) Firm Resources and Sustained Competitive Advantage. Journal of Management 17 (1): 99-120. Chismar, W. (1994). Information technology and the coordination of global organisations. 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