Strategic Management versus Strategic Planning - Assignment Example

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Strategic Management Table of Contents Table of Contents 2 PART A 4 0 Strategic Management 4 2.0 Strategic Management versus Strategic Planning 43.0 Michael Porter’s Generic Competitive Strategies 5 4.0 Components of Michael Porter’s Generic Competitive Strategies 5 6 4.1 Cost Leadership 6 4.2 Differentiation 7 4.3 Focus 8 5.0 Critical Analysis of Michael Porter’s Generic Competitive Strategies 8 6.0 Evolution of Michael Porter’s Generic Competitive Strategies 11 7.0 Understanding the Relevance of Porter’s Model in today’s Business Challenges 15 7.1 Cost Leadership 15 7.2 Differentiation 15 7.3 Focus Strategy 15 PART B 16 8.0 Real Life Application 16 8.1 Toyota- Low Cost Leadership 16 8.2 Puma- Focused Differentiation & Edward Jones- Focused Low Cost Strategy 17 8.3 Harley Davidson- Differentiation 18 References 19 PART A 1.0 Strategic Management A first time learner of management theories might define strategic management as using management concepts to gain strategic advantages for companies but unfortunately there is no concrete definition of the subject. Many research scholars still argue over creating cogent definition of strategic management. Various research scholars like Michael Porter, Philip Kotler, John Kotter, VA Zeithaml and many others successfully tried to create a theoretical framework of the concept but still their frameworks failed to create a universal theory of strategic management probably due to multidimensionality of the concept. Organizations use strategic initiatives in accordance with culture, leadership style, frequency of crisis and business objectives. Gray (1) has bifurcated strategic planning from strategic management and described two aspects in the following manner. 2.0 Strategic Management versus Strategic Planning Organizations use strategic thinking to run business and control various functional aspects of management departments while they use strategic planning a control instrument to integrate management objective, budgeting, up gradation of value chain and compensation altogether. Stein- Hudson (2) presented an alternate view of strategic planning and described the process as instrument to foster strategic thinking and strategic decision making in the organization and helping line managers and other employees to achieve organizational objectives. Meyer (3) illustrated strategic management as process that helps top level management of the company to understand business objectives, future threat and opportunities; identifying suitable strategy to deal with these issues and taking control over external variables; creating direction to accomplish strategic objective of the organization. Nutt and Backoff (4) have modified the concept of Meyer. According to them strategic management actually combines short and long term planning of the organization in order to achieve organizational objectives like increasing profitability, increasing control over existing product portfolio, achieving high growth rate, expanding many business in foreign market, creating market entry barrier for competitors by increasing competency level (Tyndall, Cameron and Taggart, 1990, p. 9). Strategic management is a multidimensional concept and the study cannot cover all the aspects of strategic management. The study will focus on a particular concept of strategic management in order to create a cogent representation of assignment topic. This report will analyze Michael Porter’s generic competitive strategies from the view point of theoretical concept and real life application in order to understand functionality of the concept. 3.0 Michael Porter’s Generic Competitive Strategies In 1980, Michael Porter developed the basic strategic model for companies in order to achieve competitive advantage over competitors. He modified the concept into more confined model in 1985. Main agenda of the model is to help organizations to create a sustainable and not easy to copy strategy with which they can not only achieve competitive advantage over adversaries but also can build a sustainable business model. Michael Porter classified the model as Generic Competitive Strategies. 4.0 Components of Michael Porter’s Generic Competitive Strategies Businesses need to identify target market for their product portfolio offering otherwise they might end up investing huge amount of money on unprofitable market. Using Porter’s Generic Competitive Strategies to create competitive advantage might sound apocryphal in contrast to implementing particular sub strategy to in terms of gaining competitive advantage. According to Porter, Generic Competitive Strategies can be subdivided into four parts. 1- Focus strategy, 2- Differentiation strategy and 3- cost leadership strategy and 4- cost focus differentiation. (Source: Partridge, and Hunt, 2005, p. 126-140) 4.1 Cost Leadership In this model, firms tend to achieve low cost on production and throughout every steps of value chain although in every case their intention might not to sell the product in lower price to buyer. Organizations tend to achieve low cost on production in order to achieve profitability by selling the item at competitive pricing. Low cost strategy helps the player to earn more profit than their business rivals by selling the product at par with competitors price. The following diagram can be used to understand the concept. (Source: Partridge, and Hunt, 2005, p. 126-140) Low cost in manufacturing can be achieved by adopting following theories of economies. 1- Economies of scale- this is a concept of microeconomics and refers to cost advantage that can be achieved by producing in large volume. 2- Economies of experience- cost advantage gained by adjusting the relationship by variable cost and cumulative production. 3- Controlling the cost at every part of value chain or by decreasing steps of supply chain framework (Besanko, and Braeutigam, 2010, p. 313). 4.2 Differentiation Companies try to capture market by developing unique functionality in their product. The difference in offering must be valued by customers and should not be counterfeited easily by competitors (Staake, and Fleisch, 2008, p. 6). Companies use this strategy to gain higher market share and creating superior brand image in the mind of consumers. Higher market share from competitors may come in various flavours like high penetration rate, positive word of mouth, repeat purchase and achieving greater customer loyalty with lower marketing and selling cost. Many organizations use success of differentiation strategy in creating low cost strategy. According to Porter, differentiation can be used to create buyer value and firm can create sustainable differentiation by incorporating various activities like clever implementation of integrated marketing communication, superior out bound logistics, quick order processing and implementing state of art technology in product mix (Porter, 1998, p. 150). 4.3 Focus This strategy gives importance on focusing on particular segment and designing business strategy to fulfil needs of that particular segment. They develop specialized skills to cater demand of particular market segment and making competitive rift for business rivals to enter in that specialised segment. In 1985, Porter argued that firms can design focus strategy by maintaining equilibrium between underperformance and over performance. 1-Underperformance- large companies fail to create a product that can satisfy demand of particular segment while small players rip off the benefit of the situation by offering product in accordance to demand of the market. 2- Over performance- large companies able to deliver offering more than the requirement of the segment and hence incurring additional cost while small players convert their product to the basic requirement and rip off benefits (Botten, 2009, p. 278). 5.0 Critical Analysis of Michael Porter’s Generic Competitive Strategies In 1986, Miller and Friesen have noted that the strategy is more successful for manufacturing industries, electronic goods industry, and paint industry with respect to other industry. In 1983, Hambrick pointed out that Michael Porter’s Generic Competitive Strategies are more acceptable for large organizations in contrast to small organizations lacking in resources (financial, human capital, technological) (Bryman, 1989, P. 169). Neo classical research studies of recent times have concluded that validity of the model is still unquestionable. In 2005, Torgovicky’s research results showed Michael Porter’s Generic Competitive Strategies can be applied in the field of e-business to create competitive advantage. The following figure can be use to understand importance of previous work on Michael Porter’s Generic Competitive Strategies (Eldring, 2009, p. 10-15). Research Scholar Sample Size (Firms) Industry Outcome of the research O’Farrell (1992) 83 UK service sector Porter’s model can create realistic competitive advantage for business Kim (2004) 75 Korean online shopping Malls The model can successfully explain competitive advantage lies in the business Thornhill and White (2007) 2351 Canadian Industries The model can be used for generating high operating margin Kim and Lim (1988) 54 Korean electronics industry Firms performed well after adopting porters generic model Miller (1988) 89 Canadian manufacturing industry Porter’s assumption to adopt pure strategy to create competitive advantage within same industry is questionable Wright (1991) 56 USA machinery industry Sustainability of Michael Porter’s Generic Competitive Strategies are questionable for small firms Hambrick (1983) 164 USA capital goods industry Porter’s strategies are most successful for large firms White (1986) 12 Canadian industry Pure strategies defined by Michael Porter help companies to attain high return on investment Miller and Friesen (1986) 102 USA consumer durable industry Cost leadership strategy which is subpart of Michael Porter’s Generic Competitive Strategies can help big large companies to gain competitive advantage over rivals (Source: Eldring, 2009, p. 10-15) 6.0 Evolution of Michael Porter’s Generic Competitive Strategies In 1980, Michael Porter a Harvard economist has developed Generic Competitive Strategy matrix after doing decade long research on critical success factor for organizations. Porter has pointed out in his research paper that many of the firms fail to adopt Generic Competitive Strategy matrix completely and stuck somewhere between low cost strategy and differentiation strategy (Lowy, and Hood, 2004, p. 139-145). According to Cliff Bowman, organizations need to apply concept of ‘strategic clock’ to understand the value of porter’s model. Value of organization’s offering is judged by the price and according to strategic clock three types of situation can arise from the equilibrium between price and offered value. 1- Organization can offer high value product in low price (hybrid model), 2- companies can offer high value product in high price (focused differentiation) and 3- they can offer low value products at low price (no frills model). Second and third model is consistent with focus strategy mentioned by porter (Angwin, Cummings, and Smith, 2011, p. 137). (Source: Cliff Bowman, Angwin, Cummings, and Smith, 2011) Many research scholars believe that Michael Porter’s Generic Competitive Strategies are by virtue path breaking while other researchers question on the originality of the concept. There are evidences like firms were using Generic Competitive Strategies during 1960’s and 70’s even before Michael Porter proposed the model in 1980. The following diagram will show the ground work behind the strategic model Developed by Porter. Year Industry Strategy Proposed By 1972 Home Appliance Low cost Hunt 1973 Chemical Process Low cost Newman 1976 Brewing Industry Low cost Patton 1977 Brewing Industry Cost Leadership Schendel 1980 USA Airline industry Generic Strategy Porter (Source: Doise, 2008, p. 50-55) Michael Porter modified Generic Competitive Strategies in regular interval to maintain relevance with industry perspective. He has revised the strategy for more than six times (1980, 1981, 1985, 1987a, 1987b, 1990 and 1996) to maintain the significance of the model in accordance with modern business needs. In 1984, Dess and Davis critically analyzed the effect of external environment on porter’s model and according to them there are five types of external environments like global, fragmented, declining, mature and emerging can affect the functionality of porter’s model. In 1992, Miller presented counterview on porter’s model by questioning the benefits of single generic strategy. He believes a mixed strategy can out done pure strategy in terms of functionality and benefits. Strategic argument between Miller and Porter can be represented in the following manner. Miller’s Mix Strategy Porter’s Pure Strategy It was proposed in the year 1992. It was proposed in the year 1980. Firms need to implement all three pure strategies like cost leadership, focus and differentiation to create competitive advantage. Firms need to adopt single pure strategy otherwise they will fail to realize advantage of each strategy. Mixed strategy will cause low profitability for the firm. The researcher did strategic study on Canadian manufacturing industry to derive his opinion. The researcher did strategic study on USA Airline industry to derive his opinion. (Source: Doise, 2008, p. 50-55) In 1979, Schendel and Hofer argued that there should not be any generic strategy for all industry because various industries customize strategy in accordance with their need. This theory counter punches Porter’s Generic Competitive Strategies. In 2000, Keller, Lynch and Ozment argued about mutual exclusivity of each pure strategy and according to them each of them can be synchronized with other to create competitive advantage. It will be unfair to finish this discussion without mentioning three phase development of Porter’s Generic Competitive Strategies (Doise, 2008, p. 50-55). Year Proposed By Context of the study 1978 Mintzberg Argued about requirement for a generic strategy to create competitive advantage 1984 Dess and Davis Concluded that each of the pure strategy proposed by Porter is essential to create competitive advantage after doing rigorous industry research 1992 Inhofe Each of the pure strategy is subset of other one and questioned about generalization of porter’s strategy (Source: Doise, 2008, p. 50-55) 7.0 Understanding the Relevance of Porter’s Model in today’s Business Challenges 7.1 Cost Leadership Companies earn profit after selling the product in the low price due to low manufacturing cost. For example, Timex watches once offered in the price of $39.95 which was way below existing competitor’s price and this was possible due to Timex’s adaptation of low cost strategy (Griffin, 2010, p. 244). 7.2 Differentiation Apple has successfully implemented Differentiation strategy in their iPhone and iPad and other offerings. Apple has not only revolutionized the concept of marketing but changed the concept category extension and product portfolio offering. They increased various applications like entertainment for kid, monitoring blood sugar, excel data using, doing social networking, making corporate presentation and many more in their offering (iPhone) to fulfil needs of multi segments of consumer. Product differentiation strategy of the company can be understood by using expectancy value model theory proposed by Philip Kotler. According to this model, buyers assign value point on various attributes of a product and then summarize total points assigned on attributes. They purchase the product has larger sum of value points. Due to iPhone’s multi functionality the product can easily accumulate large value points in the mind of consumer with respect to competitor’s product. Expectancy value model can be used to understand iPhone Obsession among consumers (FitzGerald, and Arnott, 2000, p. 107). 7.3 Focus Strategy IKEA is Swedish furniture retailer and has presence all over the world. The company uses cost focus strategy to target young people and couples planning to buy low cost stylish furniture. They have primarily targeted this particular segment to create competitive advantage over other competitors trying to offer furniture for all type of customers (Partridge, and Hunt, 2005, p. 126-140). PART B 8.0 Real Life Application First part of the study evaluated porter’s model from the view point but this part of the study will analyze Michael Porter’s Generic Competitive Strategies in the light real life corporate examples. Companies like Ford, General Motor and Apple use each of the pure strategy to create strategic advantage over competitors. Porter argued that Toyota has become cost leader by using lean manufacturing concept. Next portion of the study will discuss business strategy of Toyota (Thompson, and Martin, 2010, p. 198). 8.1 Toyota- Low Cost Leadership The automobile company has combined manufacturing speed, volume of production and flexibility in production altogether to create world class standard. The automobile giant manufactures eight different models in the same time period without compromising in quality. They have integrated all of their assembly plant under the roof of single framed network. Toyota can build cars in cost effective way by maintaining the law of economies of scale. They rigorously follow porter’s cost leadership strategy to offer cars in penetration price. Tatsuo Yoshida (Auto analyst in Deutsche Securities) has indicated that Toyota can offer cars in low market price due to average low cost on new assembly production line. The company achieved leadership position in terms of sales volume and annual vehicle production. More than sixty percent of Toyota’s cars in North America are manufactured in Japan. In 2007, market capitalization of the company was more than $110 billion more than the summation of market capitalization contributed by General Motor, Ford and Daimler Chrysler (Kotler, 2009, p. 315). 8.2 Puma- Focused Differentiation & Edward Jones- Focused Low Cost Strategy Puma is German athletic wear manufacturing company. In the mid of 1990’s the company was in midst of financial tumultuous situation in terms of bankruptcy and financial crisis. CEO Jochen Zeitz understood the depth of situation and shifted focus to porter’s generic competitive strategies. He used focus strategy to help the organization to survive in this tumultuous financial situation. CEO decreased the size of product portfolio system in order to cut down overall cost. The company started to offer cloths for armchair athletes, tennis athletes a very much specialized segment in the industry. Research analyst Roland Konen described Puma’s strategy as sustainability oriented rather than creating competitive edge over competitors. The company adopted focused differentiation strategy in terms of designing cloths with vibrant colour and changing the style value of cloths in accordance with the demand of particular segment. Edward Jones a St. Louis based brokerage firm has rightly adopted low cost focus strategy in order to create competitive edge. The firm has established business in the rural part of North America. They have successfully implemented the strategy by encouraging small time investors to do long term investment with them. The brokerage firm was successful in creating sustainable brand image in the mind of local people, small time investors and farmers. The St. Louis based brokerage firm not only earned profits but customer loyalty also by adopting low cost focus strategy (Daft, 2009, p. 70). 8.3 Harley Davidson- Differentiation Harley Davidson is an iconic motorcycle brand in USA. It was founded in 1903 by William S. Harley and Arthur Davidson. This organization was one of the major two motor cycle companies survived in the time of Great Depression. This motorcycle brand was most used vehicle by army in the time of World War 2. In 2011, Harley Davidson sold more than 0.23 million units internationally. This company specializes in heavyweight (More than 750 cc) motorcycle manufacturing. . It has achieved more than 10% growth rate for consecutive eighteen years. In 2003, this motorcycle giant celebrated its 100th anniversary with a series of global events like motor cycle rally, street racing etc. Harley Owners Group (HOG) was established in 1983 by the company. The company uses differentiation strategy not easy to be counterfeited to create competitive advantage over competitors like Honda, Yamaha, Kawasaki and S&S cycles. The company adopted the strategy after doing rigorous market research on purchase behaviour of consumers. Harley Davidson has designed value proposition to customers in a unique way to create strategic advantage over others. The motorcycle company offers various facilities to customers like test ride on dealership point, providing driving instruction to riders, easy insurance and financing scheme and membership in Harley Owners Group (HOG) to establish category leadership. They target their product to price insensitive customers in order to reap off maximum benefits from their offering (Grant, 2010, p. 263). References Angwin, D., Cummings, S., and Smith, C., 2011. The Strategy Pathfinder: Core Concepts and Live Cases. Hoboken, New Jersey: John Wiley & Sons. Besanko, D., and Braeutigam, R., 2010. Microeconomics. 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