Strategies for Management Improvement - Essay Example

 Growth Strategies Table of Contents Table of Contents 1 Ansoff Matrix 2 McKinsey Growth Model 4 PESTLE 8 SWOT Analysis 10 Porter’s Five Forces Model 13 References 20 Bibliography 21 21 Literature Review Ansoff Matrix Igor Ansoff is one of the renowned experts of corporate planning and strategic management. Originally he is a Russian. Ansoff is the first strategist who argued that competitive advantage is one of the most important elements in the planning process. Igor Ansoff, acclaimed as the father of strategic management, has made significant contribution in three major areas namely ‘real-time strategic management’, ‘the contingent strategic success paradigm’ and ‘environmental turbulence’ (Ansoff Associates International, n.d.). The matrix developed by Ansoff, defines two crucial factors of marketing. These are what to sell and whom to sell (Stone, 2001). It is entirely related to the markets and products. In this matrix there are four quadrants that represent four courses of action that could be considered while making any strategic decisions regarding the growth of the organization. The matrix is shown below. Four options of growth strategy are market penetration, product development, market development and diversification. Market penetration In this growth strategy existing products of the organization are sold in the existing markets. There are four major objectives that could be achieved by adopting market penetration strategy. These are increasing or maintaining the current market share of the existing products, securing dominance in the growth markets, restructuring a grown-up market and finally increasing the usage of the existing products by the existing customers. Increasing or maintaining the current market share of the existing products: this objective could be attained by adopting more competitive strategies regarding pricing, advertising. Putting in more resources into personal selling might also be helpful in achieving this objective. Securing dominance in the growth markets: Growth markets could be dominated by strengthening the customer base. Extensive promotion would be effective in order to achieve this objective. Restructuring a grown-up market: Any mature or grown up market could be restructured by driving out the competitors. Innovative pricing strategies need to be designed so that the competitors consider the market as an unattractive one. Again extensive promotional campaign would work as a catalyst in the process. Increasing the usage: Usage of the product could be increased by introducing new attractive offers, loyalty schemes etc. Market Development In the ‘market development’ growth strategy existing products are sold into new markets. Implementation of this strategy would include selling products in new geographical locations, establishing or finding new distribution channels and designing innovative pricing policies. Product Development One of the most effective growth strategies is introducing new products in the existing markets where the organization already has its presence. New competencies are required to develop in order to adopt this strategy. Organizations can either develop entirely new products or simple modify the existing products in order to get the attention of the customers in the existing markets. Diversification This is an extreme strategy in which organizations develop new products which are marketed in the new markets. There could be lot of risks associated with this strategy as the business is getting into entirely new market without any prior experience. Organization must have clear understanding regarding what it wants to achieve. Proper assessment of risks is crucial before adopting this strategy. McKinsey Growth Model McKinsey model is quite similar to the previously described Ansoff matrix. It is one of the most widely used growth models in the industry. According to this model growth strategies should be developed on the basis of four important aspects such as operational skills, growth skills, privileged assets and special relationships. Operational skills could be referred as the core competencies of an organization. These core competencies could be in the form of customer service, technology, distribution etc. These would be the basis of a growth strategy. Privileged assets are unique assets held by an organization. These assets cannot be replicated by the competitors (Larose, n.d.). Growth skills are required in managing the growth strategy successfully. Various growth skills include skills of developing new products, integrating and negotiating acquisitions. Apart from all these special relationships are also crucial as new options could be opened up for the firm out of these relationships. According to McKinsey model there are seven ways in which organizations can achieve their desired growth. Each of these is explained below. Existing products to existing customers This growth strategy involves minimum amount risk as compared to any other strategy. In this strategy growth could be achieved by increasing the volume of the sales of the existing products which are sold to the already existing customers of the organization. Sales volume can be increased by maintain the customer loyalty as well as increasing the purchase frequency. Existing products to new customers Growth can be achieved by selling the firm’s existing products to an entirely new customer base. It is difficult to form a new customer base for any company. Extensive promotional campaign, attractive schemes, innovative product features would be crucial in developing a new customer base. New products and services Organizations can achieve growth by offering new products and services to the existing as well as new customers. However selling new products and services to an entirely new customer base would be difficult task for any organization as it would be moving forward without any prior experience of neither the product nor the market, but selling new products to the existing customers would not associate that much of risks or difficulties. New delivery approach Growth could be achieved by selling the products or services through new distribution channels. Organizations can take advantage of any emerging channels in the process of reaching to the customers. New geographies Geographical expansion is another powerful option for achieving growth. Business organizations can sell their products and services in new geographical areas. New industry infrastructure This option of growth allows organizations to consider the opportunity of acquiring troubled competitors. New competitive arenas Organizations can achieve growth by integrating vertically or trying out it skills in other industries. Above mentioned seven options of McKinsey model could be considered by the organizations while they are trying to achieve their growth target. PESTLE One of the most useful strategic tools that could be used to analyze the external environment of an organization or an industry is PESTLE analysis. PESTLE stands for political, economic, social, technological, legal and environment. Generally PESTLE model is used to analyze the external business environment of a particular country or region where the firm is operating or wants to operate. Political factors: Considering political factors is crucial before making any strategic decisions. Various political factors would include government policies, various regulatory bodies, environmental and ecological issues, current and future legislation, international legislation, different lobby groups etc. All these factors are likely to have significant influence on the overall performance of an organization. As a consequence organizations need to give enough attention to each and every factor related to the political environment of the operating area. Economic: economy of the operating country is perhaps the most important element in this model. Business organizations are directly influenced by the economy of the country as sales of products and services are entirely dependent on the demand which is again dependent on the economic condition of the consumers. Various economic factors that are likely to greatly influence the business include trends and situation of domestic as well as international economy, seasonal issues, taxation issues, exchange and interest rates, distribution issues, market and trade cycles. Business is directly influenced by all these economic factors. Social: Whenever an organization is going to make any strategic decision it must consider various social factors as any decision is likely to influence the society directly or indirectly. Moreover the products and services that would be sold would be consumed by the people who actually make the society. Various social factors that need to be considered prior to make any strategic decision are demographics, lifestyle trends, consumer opinions and attitudes, consumer buying trends, religious and ethnic factors, role models, image of the brand and company etc. Among all these factors consumer purchasing patterns, consumers’ attitudes and opinions and demographics are the most important ones at the time of making any growth strategy. Technological: In this information age technology is one of the most crucial factors that would greatly influence on the success or failure of an organization. Moreover today technology is changing rapidly and the organizations must be adaptable enough in order to gain competitive advantage. There could be several technological factors that should be considered by the organizations are development of competing technology, rate of replacement of new technology, information and communication, maturity of technology etc. (Fullen, Podmoroff, 2006). Legal: Generally organizations remain very much conscious regarding various legal issues as these issues make situations complicated for the firms. As a result business houses always need to be aware of all the relevant rules and regulations. Organizations often found to be bearing huge cost when they are involved in any complex legal issue. Environment: Today environmental issues are the most relevant issues for any business organization as environment has become the prime concern of most of the governments and organizations. Industries like manufacturing or steel are becoming more concern regarding environment as people often claim that automobile or steel plants are highly responsible for polluting the environment. SWOT Analysis SWOT analysis is one of the most important strategic tools that have been used over the years with the purpose of auditing a company as well as its environment. Both external and internal environment of an organization are analyzed with the help of this tool. SWOT stands for Strength, Weakness, Opportunity and Threat. Strength and weakness are company’s internal factors whereas opportunities and threats are company’s external environmental factors. SWOT analysis is the first stage of any organizational planning. Management can focus on the key organizational issues with the help of SWOT analysis. In SWOT analysis information are taken from organization’s external and internal environmental scan. SWOT analysis help organizations to find out whether there is any obstacle that needs to be overcome or there is any new opportunity that needs to be capitalized to stay ahead in the competition. Four elements of SWOT model are described below. Strengths: Strengths of an organization ought to be realistic in nature. They are internal to any organization. Strengths of an organization could be its resources, capabilities, experience, reputation, people, knowledge etc. Company’s list of strengths must address its advantages, relevant resources and its core competencies. Weaknesses: Weakness is another internal force of an organization. Weakness could be referred to as any force that acts as a barrier in maintaining or achieving a competitive advantage. It could also be referred to as a limitation, defect or fault of a business unit. Weaknesses need to be realistic in nature so that they could be overcome as early as possible. Weaknesses of a business unit should address questions like ‘what needs to be improved?’, ‘what has been done poorly?’, ‘what needs to be avoided?’etc. Generally weaknesses of a business unit would include gaps in financials, capabilities, morale and deadline. Whenever weaknesses of an unit are developed thinking should be in terms of gaps in capabilities, disadvantages, problems regarding competitive strength, financials, reputation, leadership, morale, timescale, process etc. Opportunities Opportunities could be referred to as any present favorable situation. Favorable situations that are likely to arise in future can also be considered as opportunities. Opportunities are generally external environmental factors. Opportunities could be in the form of arrival of any new technologies, unfulfilled customer needs, loosening of rules and regulations, economic boom, global influences and demographic shift. Factors that need to be thought about include market developments, lifestyle/industry trends, competitor vulnerabilities, partnerships and alliances. Threats Threats are the important external environmental factors that need to be properly addressed in order to gain sustainable competitive advantage. Threats are likely to work as a barrier in the process of attainment of competitive advantage. Threats could come in the form of new regulations, shifts in consumer choices, environmental effects, economic meltdown, new technology, competitor intent, loss of key employees, political effects etc. the list of threats needs to be able to address important facts like obstacles that the company is facing, activities by the competitors, effect of changing technology on the current position of the business. There are several benefits of SWOT analysis. First of all the process is very simple and flexible in nature. Moreover cost involved in conducting a SWOT analysis is very low. SWOT analysis is not a one step process. Different steps involved in it are listed below. Firstly data is collected after scanning the both external and internal environment of the business organization. Once this is done the list of strength, weakness, opportunity and threat is developed. After that clarification of all the opportunities, threats, strengths and weaknesses is done and then they are categorized into themes. Once this is completed prioritization of this list is done. Then implications of SWOTs to the business unit is found out and based on the above mentioned steps possible appropriate strategies are developed. Some of these strategies which are found to be most appropriate are selected. These selected strategies are then incorporated into strategic plan and finally documentation is done (Keeley, n.d.). Porter’s Five Forces Model Any industry’s economic structure as well as its complexities is dependent on the economic forces and social trends. It has immediate effects on the business managers as the strategies and competitive rulers are determined by this. Industry’s structure could be analyzed by analyzing its competitive forces. According to Michael Porter there are five competitive forces that play an important role in shaping the structure of any industry. These five forces are bargaining power of buyers, bargaining power of suppliers, rivalry among competitors, threat of new entrants and finally threat of substitutes. Stronger these forces are, stronger the challenges for the organizations. [Source: College of St. Scholastica] Bargaining power of buyers Bargaining power of buyers could be referred to the influence of customers on the business and its profitability. Value is being created in the process of transaction between the buyer and seller. But an organization would not be able to capture most of this value if buyers are having more bargaining power. Generally buyers have more bargaining power when they are huge in number and purchase a large amount of the product. There are various factors that could affect the bargaining power of suppliers. These factors are described below. Suppliers are most powerful when there are small numbers of supplier who can provide the inputs. Furthermore when inputs are unique in nature, it becomes costly for the organizations to switch suppliers. When amount of purchased input is very small then suppliers have more bargaining power. Furthermore if products can be directly sold to the customers by the suppliers then also suppliers have more power to bargain or negotiate. Sometimes it happens that organizations find it costly as well as difficult to switch supplier. In this type situation also suppliers have high bargaining power. There is several ways in which organizations can reduce the power of suppliers. Some these are explained below. If organizations do not have enough resources for producing the inputs then they can simply make partnership with their suppliers in order to reduce the bargaining power of them. Another useful option of reducing suppliers’ power is forming buying group which would consist of small producers. Suppliers bargaining power Suppliers generally have significant amount of bargaining power as every business requires some inputs which include labor, raw materials, parts and services. Suppliers bargaining power could be realized at the time of negotiations regarding prices and various other terms and conditions. Suppliers are likely to have more bargaining power when there is less number of suppliers in the market or required inputs are unique in nature or suppliers are able to sell the product directly to the end customers. Just like suppliers bargaining power there are several factors that could influence buyers’ bargaining power. Buyers are likely to be more powerful when there are number of suppliers is small and number of buyers is huge. Moreover when the products are heavily used by the customers then also buyers can impose more power on the suppliers. If the situation is evaluated from suppliers’ perspective it would be found that today all the market information is accessible to the customers/buyers. As a result organizations have hardly any space to negotiate with the buyers. Again if product offered by the supplier is not exclusive or unique in nature and it can be bought from any other supplier then also buyers would be in a favorable position in the process of bargaining. In today’s technology driven world organizations are capable of making any product. If buyers are able to make those products that are generally offered by the suppliers then suppliers’ bargaining power would be reduced and buyers’ bargaining power would increase. From suppliers point of view it is very important to reduce the bargaining power of buyers. Organizations can reduce their buyers’ bargaining power by selling products directly to the customers, implementing various loyalty programs and enhancing the perceived value of the product. Rivalry among existing players Rivalry between the existing players is often found to be the strongest among the Porter’s five forces. Nature of this rivalry is found to be different in different industry. Organizations’ ability to reduce or increase prices is very much dependent on this competitiveness. As a result organizations’ profit is also influenced by the nature of the rivalry. Rivalries are intense in nature when there are few numbers of firms are competing with each other to be the market leader. Rivalries are also high when the market is not growing at a reasonable rate; market is shrinking and switching cost between products for the customers are not high. Rivalry among existing players could be influenced by various factors that are described below. It has been found that in many industries there is high chance that one organization or a small number of organizations can become the dominant player or rather market leader. Two or three big players are found to be experiencing intense rivalry among them in order to achieve the status of market leader. Rivalry among existing players is intense when the market is either shrinking or growing slowly. Furthermore when potential of selling products is declining or stagnant then also competition among organizations becomes more intense as it becomes difficult for them to grow. As a result they have to take away the market of their competitors. There are some amounts of fixed cost associated with each of every product in the market. When a significant portion of cost of producing products is not dependent on the total number of units that are produced, then organizations feel huge pressure of producing larger volumes. This might tempt companies to reduce prices drastically and this result to huge competition. Perishable nature of products and services is one of the main reasons behind the intense rivalry among the existing organizations. Since products are perishable they are required to be sold as early as possible. This is why companies get into price competition aggressively. Today there are huge number of products and services in the market. As a result consumer can easily stop using one product and switch to another one. This is another main reason behind intense rivalry. There are several techniques by which threat of rivals could be decreased. In order to avoid price rivalry companies need to distinguish their products from the competitors’ products. Other strategies of reducing rivalry include targeting unique or unidentified market segment. Products could be distributed through some new channels. Increasing customer loyalty would be another effective way of reducing competitors’ threat. Threat of New Entrants New entrants are potential threats for the existing organizations in the same industry. Main reason behind this fact is that new entrants always come up with significant amount of resources as they want to grab the market share as early as possible. Analysis of the threat of new entrants would involve the analysis of barriers to make entry. It would also involve the analysis of predictable reactions, coming out because of these new entrants, of existing organizations. Threat of new entrants increases when there are no patents or regulations to protect the processes. Moreover when customers are very little loyal to the brands, a new company can make a strong presence without spending much in advertising and other promotional activities. Process of entering in an industry for a new company is likely to be easy when associated startup costs are not high. Threat of new entrants is high when products which have already been provided are not exclusive and cost of switching products of consumers is low. In some industry production process can easily be learned by any new comer. In this type industry threat of new entrants is likely to be very high. Furthermore when inputs can easily be accessed by the companies, then also new organizations are likely to come as strong competitors. Threat of new entrants could be reduced by enhancing the brand image, creating alliances, utilizing patents. Threat of Substitutes Threat of substitutes arises when there is an alternative product in the market with lower price and same or better features. Complimentary products may also serve as a threat to the main product. The threat from substitutes is influenced by various factors which are described below. Substitutes are likely to pose a great threat when the existing product is not offering any significant benefit or when switching cost of products for the customers is not high or when there is hardly any loyalty from customer’s side. Threat of substitutes would be reduced producers stay connected with continuously changing customer tastes (Purdue University, n.d.). References Ansoff Associates International, No Date, Igor Ansoff, Founder Chairman Igor Ansoff [Online] Available at: http://www.ansoff.com/founder.html [Accessed on February 6, 2010] Fullen, S. L. Podmoroff, D. 2006, How to write a great business plan for your small business in 60 minutes or less, Atlantic Publishing Company Keeley, E. J. No Date, What is a SWOT Analysis?, How to Conduct A SWOT Analysis, Online] Available at: http://www.oie.eku.edu/docs/2005-06/SWOT%20Analysis.pdf [Accessed on February 6, 2010] Larose, P. No Date, Marketing of Financial Services, Chaoyang University of Technology [Online] Available at: http://www.cyut.edu.tw/~finance/docs/Marketing%20of%20Financial%20Services.ppt. [Accessed on February 6, 2010] Purdue University, No Date, Industry Analysis: The Five Forces, Purdue Extension, [Online] Available at: http://www.ces.purdue.edu/extmedia/ec/ec-722.pdf [Accessed on February 6, 2010] Stone, P. 2001, Make marketing work for you: boost your profits with proven marketing techniques, How To Books Ltd Bibliography Dess, G. Lumpkin, G. T. Eisner, A. B. 2007, Strategic Management: Creating Competitive Advantages, McGraw-Hill/Irwin Griffin, R. W. 2007, Fundamentals of Management, Cengage Learning Grant, R. M. 2002, Contemporary strategy analysis: concepts, techniques, applications, Wiley-Blackwell Marx, G. 2006, Future-focused leadership: preparing schools, students, and communities for ..., ASCD Read More