Approaches of Michael Porter and Gary Hamel - Term Paper Example

Introduction The two basic approaches of Michael Porter and Gary Hamel to the paradox of markets and resources are the industrial organizational approach and sociological approach. These approaches vary significantly in terms of their application to the success of business and rely on theoretical and practical explanations. Michael Porter and Gary Hamel have made paradoxical conclusions on market shares and their affect on world businesses. Their argument indicated that companies recording low and high market shares affect the profitability of such organizations. In this regard, the two cases are perceived as extreme and capable of increasing the profitability of the companies. The organizations, which have average market share, do not get high profits, a situation that necessitates changes in resource utilization and management strategies that the company must use to achieve the intended goal. Industrial Organizational Approach In business, industrial organizational approach relies on economic theory to describe different markets and resources. The basic issues under this approach include competitive rivalry, economies of scale and resource allocation. The choice of a business model in a company will have profound effects on the organization’s rate of revenue, the competitors in the market, and the capital needed. In general, business model creates essence of the breakthrough idea. A company may be tempted to integrate more than one business model in its operations. This is a make-or-break decision that the management needs to tactfully make as they lead the company towards its goals and mission (Hosmer, 2007). Consultations have to be made on the different models that exist and those that would suit the company’s profile. In addition, these consultations have to involve advisors from the industry but who are dealing in different product lines, as well as get the advice of a different trusted advisor from an entirely different industry so as to have out-of-the box thinking. The result will be contradicting as the advice from the different advisors may conflict, and the business models’ financials have to be undertaken. The relationship between industry structure and competition needs to be reconsidered and explore more rigorous and sophisticated approaches such as game theory (Hill & Jones, 2009). Porter’s five forces act as a diagnostic tool for industry structure. The model revolves around five competitive industry forces that erode long-term industry average profitability. The ultimate function of the model is to explain the sustainability of profits against bargaining and against direct and indirect competition. The five forces that shape business strategy are: threat of entry to the market from other organizations; Supplier power; Buyer power; Availability of substitute products and Existing competitors. The above forces when diagrammatically represented appear as shown below. Figure 1: Porter’s Five Forces The company should be cautious when applying Porter’s model in order to avoid any underestimation or underemphasises of the company's existing strengths and capabilities. This model provides the company with one of two dimensions in maximizing corporate value creation. Porter argued that the stronger each of the five forces is, the more restricted the established firms are in their ability to increase prices and earn greater profits. Therefore, a strong, competitive force may be viewed as a threat as it depresses profits. Alternatively, a weak competitive force can be viewed as an opportunity since it allows a company to reap greater profits. The strength of the five forces changes in accordance to the existing industry conditions. Managers are faced with the task of finding out how these changes are able to bring about a new opportunity or result to a threat, and be able to formulate appropriate strategic responses (Hill & Jones, 2009). In Porter’s model, the competition within an industry in which the company operates is provided by the nature of the rivalry between the existing firms, the threat of potential entrants, substitutes, suppliers, and buyers. On the other hand, Michael Porter and Gary Hamel outlined some of the assumptions in this approach, including rationality, profit maximization and self-disciplined behavior. For example, the models that a company employs and its theoretical foundations have been the subject of constant criticism with its critics arguing that the structure-conduct-performance that forms its approach to industrial organization lacks rigor when compared with the logical and mathematical robustness of game theory (Hosmer, 2007). The model’s approach is nevertheless significant as it allows a company to understand competition and to predict any possible changes in profitability with reference to changes in industry structure. Despite what critics may have to say, several sobering findings have proved that need to clearly understand more deeply the determinants of competitive advantage in an industry is vital towards its profitability (Scribner, 2008). Sociological Approach This approach is mainly concerned with human interactions. Michael Porter and Gary Hamel indicated that the nature of human interactions in a company determines its response to the ever changing markets and resource availability. Taking Wal-Mart as an example, the company has succeeded in adopting competitive strategies to counter competition and enlarging its market share. As established from the internal and external matrix, Wal-Mart falls in the part of hold and maintain quadrant. The tactical strategies of the company should now focus on the market penetration and product development. Market Penetration Tactical strategy on market penetration involves strategic efforts geared towards increasing the market share of Wal-Mart’s existing products. This is an appropriate strategy for Wal-Mart given its economies of scale among the competition (Stern & Stalk, 1998). The stable financial position enables the company to influence the market to its favor if they garner efficient marketing strategies. The organizational culture of Wal-Mart is suited for the market penetration strategy. The management of the company has inculcated the core competence values necessary for the employees to steer market penetration. By employing the penetration strategies, Wal-Mart increases its sales, thereby, providing further opportunities for the growth of its products as well as employee development (Thompson, 2006). The cost effect of this strategy is minimal compared to the resulting benefits. The company has to enhance the marketing strategies to enable market penetration. Further, the strategy will just need several days for Wal-Mart to begin enjoying the fruits of the campaign. As such, the benefits of this strategy are immediate with increased market share and sales volume (Coulter, 2005). Product Development Product development strategy involves the efforts aimed at increasing product sales by modifying the current products that Wal-Mart offers at its stores. This strategy is essential for the company to enhance its market share (David, 2007). The power of market position that Wal-Mart possesses will enable the company to propel its division-wise development. This ensures that the company improves its production capacity through extensive marketing research and development. In order to implement this strategy and depending on the degree of application, the company must incur varied costs on the process of developing and/or modifying its products. If the company focused on establishing efficient research and development facility as a prerequisite to the product development strategy, then the project will cost billions of dollars. However, if Wal-Mart focused on a division-wise product development, the cost would be quite minimal (Thompson, 2006). Further, the length of time taken on the project will also vary according to the company focus. If the company’s emphasis is on the product development per division, then the time will be shorter. The benefits of this strategy are as immediate as the time frame provided for the project and includes increase income and enhanced customer loyalty (David, 2007). Strategy Implementation Both the market penetration and product development strategies will significantly influence the operations at the functional areas of Wal-Mart. The marketing department, for instance must be highly involved in the implementation of these strategies. Another department that must also be highly involved in the implementation process is the finance department since the marketers need money to facilitate their marketing campaigns (Thompson, 2006). The management should also be involved in formulation of supporting policies. The supportive policies are necessary to enable the company to manage its target increased customers. The management also has to establish efficient business intelligence techniques that would enable the company to measure the impact of the marketing strategy. This may include policies that enable day to day analysis of the sales volume, thus providing the implementation team with feedback about the corporate strategic performance. Some of the assumptions under this approach include bounded rationality, profit sub-optimality and satisfying behavior. Regarding these assumptions, Michael Porter and Gary Hamel also indicated that there is an expounded competition in the industry in which a business operates, and the model of pure competition implies that risk-adjusted rates of return need to be constant across different firms and industries as reported in Hill & Jones (2009). Such competition affects the company’s bounded rationality, profit sub-optimality and satisfying behavior among its employees. However, studies that have been carried out on economics affirm that different industries are able to sustain different profitability levels, behavior and industry structure explains part of this difference. Apparently, it is mainly caused by the variations in the applications of divergent policies in the company. In addition, the model remains a guide of choice by many renowned corporate leaders and strategic managers the world over, meaning that the researcher will have to use it. The concept is of paramount importance in developing a company’s competitive advantage (Hill & Jones, 2009). Understanding Global Business Strategies and its Affect a Strategic Leader’s Choice In understanding global business strategies, there are several examples of how changing world and/or organizational circumstances affect a strategic leader’s choice between these approaches. The management strategies are also useful to ensure proper accountability and ways in which this can be improved. The other objective is to ensure a good strategic management to divert any eminent challenges in future so as to have a clear roadmap for the business. Analysis of major factors affecting the strategic management is looked at (Elop, 2011). The political and social environment can determine the productive nature of the organization’s performance. Economic factors can be described as the market stabilities, which are affected by either inflation or deflation. The main strategies, which a company adopts, are concerned with trends in the environment and their events. These have potential to affect the given strategy and leadership choice. In performing this analysis, it is essential to limit the analysis to those places, which are relevant and can have considerable impact on the intended strategy. Environmental analysis has five categories, political, technological, economical, and sociological aspects. Political happens when the government has political good will, hence the regulations being put in place change business mode of operation. Like good policies and political good will to enhance business operation. These taxes and incentives can affect business strategy development. Comparably, technical information determines what extent the existing technology to be effective. Hamel Company uses an advanced technology to enhance its products output. They have well equipped modern factory, which has enhanced production of more coffee products. Focusing on the economic aspect, the United States has a stable economy hence this has ensured minimal cost of production and good supplies (Elop, 2011). The inflation or deflation is not realized in the company because of the stable economy. Socio-cultural reflects on the current emerging trends in the lifestyle since they were dealing in food industry, these products are really selling and they have a good market. The emerging trend in life style is that people really value cakes for their celebrations and general usage of the house. The ready market enables the company to expand rapidly because it is in line of its business strategy. Human resource challenges are numerous in number because they are of different categories (Iancu, Popescu & Popescu, 2010). The most important challenges are change managements in the business. The environmental HR challenges, workplace diversity, leadership development, retention and motivation or HR effectiveness measurement, compensation, and attracting the best talent. The company was able to deal with all the forms in the most professional way. The human resource manager introduced training on knowledge development based on utilization skills and continuous training to enhance individual competency. The company would never succeed without all these professional approaches towards the proper management and treatment of its employees (Iancu, Popescu & Popescu, 2010). The Hamel observed that the average number of years or tenure for some professional employees is less than three years. This applies to IT professionals, marketers and other middle strategic managers. The company offers good remuneration to maintain its employees. There is also a problem of attracting the best talents. In a tensed job market, most organizations always experience concurrent demands to get the same kind of talented professionals. In their pursuit for talented employees, they end up cajoling talent all over the world. An employee with good communication skills, with capacity to think logically and being able to be analytic coupled with excellent leadership qualities is of great importance to the organisation (Hamel, 2002). The Hamel never faced all these challenges. When these challenges are addressed, it will have certain implications. The company may offer to pay the required amount at the market demands, but the cost of operation is going to be raised rapidly. This has the effect of reducing the profit margin. For its effectiveness, the management should undertake regular assessments on all issues including pay, work environment, benefits, administration, and promotional opportunities to monitor the progress in long term basis (Hamel, 2002). References Coulter, M., 2005. Strategic Management in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. David, F., 2007. Strategic Management: Cases. New York, NY: Prentice Hall. Elop, S., 2011. Strategic Management. New York, NY: John Wiley & Sons. Hamel, G., 2002. Leading the Revolution. New York, NY: Plume Publishers. Hill, C., & Jones, G., 2009. Strategic Management Theory: An Integrated Approach. Stamford, Connecticut: Cengage Learning. Hosmer, L., 2007. The Ethics of Management. New York, NY: McGraw Hill. Iancu, A., Popescu, L., & Popescu, V., 2010. The Moral Aspect of Business Decisions. Journal of Economics, Management & Financial Markets, 5 (2), pp. 250-56. Scribner, S., 2008. Introduction to Strategic Management. Retrieved April 6, 2011, from http://www.lachsr.org/documents/introductiontostrategicmanagement-EN.pdf Stern, C., & Stalk, G., 1998. Perspectives on Strategy from the Boston Consulting Group. New York, NY: Wiley. Thompson, K., 2006. Analysis on Wal-Mart Using the IE Matrix, SWOT Analysis and More. Retrieved April 6, 2011, from Read More