Risks and Benefits of Organic Development - Essay Example

STRATEGIC MANAGEMENT By of School 28 July Introduction Market competition determines the success and the failure of a firm or an industry. Therefore, to have a sustainable market advantage, industries make their choice of strategy which would make them most favorable in the market. Organizations have to configure their resources and competencies in order to achieve competitive advantage. A competitive advantage is achieved when there is a competitive match between the distinguishing competencies of a company and factors crucial for the success of an organization, thus enabling it compete favorably with competitors. It is difficult to make decisions concerning competitive strategy on a practical level due to the wide range of factors that influence the decision making. Organizations are often challenged by the existing opportunities in the market when managing the dynamic environment and competitive markets. Marketing strategies and complexities can be handled based on models by Michael Porter and Cliff Bowman. The models provide effective and important factors that are crucial to industrial competition; the models further identify possible regions for innovation. Critical Success Factors In order that a company competes effectively, it needs to adjust its strength to meet the environmental opportunities. According to Dorrego and Rodrigues, “managers need to identify, combine, recombine, and manage their resources, competencies, and capability to explore their potential and perform better than their competitors” (n.d., p.364). The major deficiency of strategic implementation is inability to formulate and translate statements of strategic purpose, for example, the market share gain and the failure to identify the factors that are critical to the achievement of objectives, as well as the identification of resource to enable success. A critical success factor has been defined by Kachru as “a feature of an organization or its environment which, by its nature, has such an impact on the success tracking, measurement, achievement, or avoidance, hence becomes critical to success” (2005, p. 449). Bryson too adds to the definition that critical success factors are the things an organizations can’t do without; they formulate the criteria the companies have to meet, as well as the performance indicators (2011). Organizations that have well organized strategic factors often achieve better and fit to the environment; with this, they manage to survive. Stages of strategic success factors: Identification: The success factors for a specific strategy are identified; such a list should be small for ease of implementation, for example, the development of a global network and supply chain management. Making key decisions: At this stage, fundamental competencies necessary for achieving competitive advantage in critical success factors are identified. The list made should undergo an intense scrutiny to ensure that there is competitive advantage. Further decisions to be made concern the impact to be encountered in case of a competitive move from the competitors, and a means of encountering it. Information details: Detailed information concerning the strategy is required to give substantive support to the decisions made. Through thorough information, important performance standards are achieved; these are very valuable to outwit the competitors. Resources Resources are the assets that an organization needs so as to achieve its goals or perform well in its critical success factors. They may be grouped as follows: Physical resources. Tangible and intangible resources. Human resources. Financial resources. The most essential factor concerning resources is to know what is available for the company, and at the same time, the company needs to know what it lacks, as well as how things may change in the future. There are basic and unique resources. Basic resources are the ones that are the same as those of the competitor, while unique resources are those that are different from the competitors’. Therefore, unique resources are important in creating competitive advantage. Unique resources may be given as: Product. Situation i.e. nearness of material and labor. Sunk costs. Competencies Competencies are a subset of resources as they constitute abilities, actions, or processes for which an organization is able to administer and enable it to achieve better performance. An example is the Sony competencies of miniaturization that have enabled it manufacture varied products that are profitable and in large quantity. Another example is the Canon competencies in the field of optics microprocessors and imaging. It has enabled them venture into large markets of printing, scanning, photocopying, and camera (Bryson, 2011). Many organizations have strengths and weaknesses. When it comes to strategic formulation, it’s essential to maximize strengths and reduce weaknesses. The core competencies are defined by strong points that make the company unique from the competitors, as far as customer satisfactions are concerned. The capability of the company is based on the competencies. These competencies include special knowledge, skills, and technology. Core competencies are also associated with the assets held by the company, whether tangible or intangible, as long as they provide significant benefits to the customer. Sustainable Competitive Advantage Sustainable competitive advantage is determined by the speed with which competitors can emulate a leading company’s strategies and plans. The key thing is to identify the advantage in which the leading company utilizes. There should be a strategy to emulate and modify that advantage to fit to the system. Strategic factors, competencies, and resources are very fundamental ingredients to sustainable market competition (Kachru, 2005). Their combined contributions are characterized by: Market penetration: A company using market penetration strategy would try to increase the market share among the available customers. Aggressive advertising is one of such methods. Market development: Market development looks to increase the number of existing customers. The new customers are stimulated by the old customers while at the same time, increasing their intake. An example of such a company that has benefited through this strategy is McDonalds. As cited by Lamb, Hair, and McDaniel, it “has opened restaurants in Russia, China, and Italy and is eagerly expanding into Eastern European countries” (2008, p. 42). Diversification: This is a strategy whereby new products are introduced into the market and in return, increase the sales. Sony is one of such companies that increased its sales through diversification; this is evident through the acquisition of Colombian pictures. Product advancement: This strategy entails creation of new products in the market, for example, the introduction of poplin suits by Brooks Brothers. The suits are made of polyester and absorb moisture away from the body. A company that follows the product management strategy can apply its understanding of its target customers. Organic Development Organic development is termed as a permanent opportunity which is just a small distance from the current position of the company (Mognetti, 2003). Organic development originated from the fact that many corporates had realized an extra-ordinary growth both in terms of revenues and earnings. It’s now due to the effects of internal growth that many companies’ executives struggle. This suggests that even though most companies may be after organic growth strategies, only small number are gifted with skills, practices, and experience that would lead them to success. Hess and Kazanjian suggest that “the economic environment for growth presents daunting obstacles in the form of saturated markets, the inability to raise or even maintain prices in the face of intense competition, and economic uncertainty due to geopolitical conditions” (2006, p. 1). Mack (n.d.) says that organic growth strategy involves the strengthening of the company by use of existing energy and resource. Although it is a slower approach, it has a low front costs, a feature that makes it more attractive for business persons with an intention of extending their business, but lack liquid finance. Organic development has the following virtues: It presents the position of a satisfied customer. A positive feedback from the customer is expected, failure to which the company would be placed in a position that implies that there is no growth. It justifies the continued close relationship with the customer, leading to an exceptional relationship based on mutual respect, whereby the company can assert to have developed stupendous skills in observation, listening, and implementation. Organic development allows the company to keep hold of the customer’s expectation and ensure that it remains innovative. On the side of the staff, they gain an advantage of achieving educational value due to the organized repetition of quality practice. Organic development represents a valuable platform for the development and empowerment of people through rejuvenation of opportunities associated with the growth. The staff is prepared for external opportunities due to the fact that organic growth is associated with managerial training, based on speed reactions and mandatory quality (Mognetti, 2003). Organic growth is an excellent tool. Like a double barreled system that is used to spur growth, its advantage is the reliability on excellence in process and as Mognetti says “it is based under specific circumstances, on getting priority dividends in the form of more information from customers because of their confidence in the company” (2003, p. 15). Organic development requires that there should be an efficient retrieval of fundamental information to discover opportunities relevant for growth in any existing company. This would enable the company to segment the product, while ensuring that the process remains reliable and responsive. Risks and Benefits of Organic Development Benefits The most important advantage associated with organic development is that it has the capability of making the company stronger, compared to the competitor. Mack suggests that “a company that continually devotes its profits to improving its quality-control department offers increasing value to its customers, making it an increasingly formidable competitor” (n.d.). A further benefit of the organic strategy is that it has the capability to ensure customer retention. Investments of profits from the sales back to the customers department helps to attract new customers, and at the same time, strengthen the existing customers. Other benefits include: An investment can be developed according to the actual needs and objectives of the company. The investment can be made progressively depending on the disposable resources. There is the use of new technologies. Efficiency in investment positioning. A new investment can easily fit into the already existing investment. The process provides an opportunity for easy decision. Risks Organic development is associated with some risks. A case scenario is if a company decides to invest its resources organically, while the competitor decides to take the external development strategy. It is easier for the former to go from an easy competition to a much complex one and easily get outmatched. The competitor may as well have the chance to offer quality products and better customer services. Therefore, it can be said that external growth gets faster results than organic growth. Since the company or the investment determines the capacity of production, there is the risk of experiencing overcapacity if the average demand does not rise adequately. There is a high risk in any company associated with overcapacity. This is due to the fact that it can cause price competition among the competing companies and consequently, fall in the margins and cash flows (Dringoli, 2012). For an investment to be expanded, more time may be needed since there could be difficulty in acquiring the appropriate machinery. The increase in production capacity has a negative effect on the product prices. As for the case of a hospitality business pursuing organic growth, it has some advantages in that it is able to retain total control of the developmental course and direction, and by so doing, can be able to plan more efficiently by making appropriate distribution of resources, as well as monitoring the development process. Furthermore, it may be able to retain the achievements gained through the choice of the developmental route and direction. As Hassanien, Dale, and Clarke say, “they achieve financial and reputational gains that may be derived from the success of the growth route” (2010, p. 180). The risk that may be encountered by a hospitality business in case it adopts this strategy is that it has to be cautious to avoid overexpansion into other business activities. The business is supposed to have full knowledge of the extent it would go in a given direction. Based on knowledge and expertise, it would be difficult for an Italian investor like a restaurant to do well in a Greek environment. Further risk attributed to organic development is that the business has to incur both the financial and reputational costs associated to any route taken, for which it is not always guaranteed that there will be success; it can be marred with difficulties and losses. Cost Leadership Strategy The cost leadership strategy is significant in competition as it provides goods of trade at a price that is lower than that of the competitors. To succeed with this strategy, it requires the following: Use of facilities that improve the economy. Efforts to minimize per unit overhead and other costs, such as manufacturing, labor, marketing and after service. Doing away with customers whose cost would result in high after-service cost. Cost leadership strategy is often associated with rapid growth and high demand for profit. It is often used by E* trade financial corporation. As Hellriegel, Jackson, and Slocum suggest, “E* Trade emphasizes its low commission and margin rates on its web site by advertising statements such as “no annual fees,” “no account minimums,” “customizable, no- fee trading platform,”” (2007, p. 242). Differentiation This is one of the generic strategies involving the use of unique products to enable a small business to change premium price. For a small business to differentiate its product, it has to integrate its product design and features. Others according to Goldman and Nieuwenhuizen, are the “appearance, reliability, durability, quality, a fast and/or fee maintenance and repair service and warranty” (2006, p. 77). This strategy has been compared to the focus type of strategy. The main aim of differentiation strategy is to include differentiating features into a service by making customers prefer the small products to the products of the competing companies. Differentiation is said to be successful when it enables a small business to: Command price for its service or product. Increase sales of units as well as service, Increase the loyalty of the buyer. Small businesses that use this strategy ensure that they appear different from their competitors by making sure that their products are valuable. In so doing, differentiation differentiates the services of a small business from that of the competitor. It employs the use of technology, unique products, and good service deliveries. An example of application of the differentiation strategy is in the BMW Company, whereby it serves a wide region of market, but in the eyes of the customers, it is differentiated. The loyal customers even prefer paying higher prices than those of Toyota. The main contrasting feature between cost leadership strategy and differentiation strategy according to Faulkner is that cost leadership strategy requires an efficient organization, while differentiation strategy requires a flexible organization (2002). Porter’s Generic Strategy Porter’s generic strategy framework comprises of a major involvement to the advance of strategic management. Porter’s analysis is based on the fact that a company’s profit is achieved through calculation of the difference between the revenues and the cost. A high profit is as a result of having lowest cost. Porter incorporated the use of cost leadership and differentiation in management. In his argument, Porter believes that a company can achieve competitive advantage by differentiating its products and services from those of the competitors, as well as having low costs. To achieve this competitive advantage, the company has to utilize cost leadership, differentiation and focus. Companies that tend to adopt the method of becoming the lowest cost producers use the cost leadership strategy. With the lowest cost, there is high probability of earning high profits, especially when the competing companies are undifferentiated and are selling at the market price. Companies following this strategy place more emphasis on any possibility of reducing cost in any activity undertaken. As in the case of differentiation, porter argues that a company has to incur some extra cost due to advertisements, and expenditure incurred during the promotion of differentiated products. While Michael Porter has four generic strategies that he thinks can be summed into two (i.e. low cost leadership and differentiation), and still achieve competitive advantage, Bowman is not for the idea; he argues that “it is false to choose between these two orientations. Only the low cost strategy, with internal success criteria establishing differentiation and delivering at low cost will” (Faulkner 2002, p. 313). When cost leadership is to lead to competitive advantage, Porter suggests that it is necessary that the company charges an average price. This makes the cost leadership disadvantageous, since it may be difficult to achieve maximum economies. Bowman’s Strategy Clock In many markets, most goods and services can be obtained from any company, and at the same time, the customer has a privilege to choose what, where, and when to buy. For a company to get hold of the customers, it needs to make better goods than those of the neighbors therefore it now depends on how smart a company would be to fend off the competitors. This is why porter came up with his three models strategy. According to Mind tools, Cliff Bowman and David Faulkner developed what is known to be “Bowman’s strategic Clock”, based on porter’s strategies. The model expands the Porters model into eight positions. It explains the cost as well as its perceived value as applied by the firms. It also identifies the success associated with each strategy. The eight positions are as follows: Low price/low value. Low price. Hybrid (moderate price/ moderate differentiation). Differentiation. Focused differentiation. Increased price/standard product. High price/ Low value. Low value/ Standard price. Bowman’s strategy is a very important model that enables one to understand how companies compete in a market. Given the varied combinations of prices and perceived value, it is easier to select a position of competitive advantage that helps make meaning to the individual and the company. This is a very important tool necessary in getting sustained in a market driven economy. Through understanding of the eight strategies, it is easy to analyze and make important adjustments that would improve the overall position. Reference List Bryson, John M., 2011. Strategic Planning for Public and Nonprofit Organizations. New Jersey: John Wiley & Sons. Dorrego, Pedro F. and Rodrigues, Helena S., n.d. Critical Success Factors and Core Competencies. [online] Available at: < http://www.irma-international.org/viewtitle/17634/> [Accessed 25 July 2014]. Dringoli, A., 2012. New Perspectives on the Modern Corporation. Northampton: Edward Elgar Publishing. Faulkner, D., 2002. Strategy: Critical Perspectives on Business and Management, volume 2. London: Routledge. Goldman, G. and Nieuwenhuizen, C., 2006. Strategy: Sustaining Competitive Advantage in a globalised Context. Claremont: Juta and Company Ltd. Hassanien, A., Dale, C. and Clarke, A., 2010. Hospitality Business Development. London: Routledge. Hellriegel, D., Jackson, Susan E. and Slocum, John W., 2007. Pkg Le Managing: A Competency Based Approach. Boston: Cengage Learning. Hess, Edward D. and Kazanjian, Robert K., 2006. The Search for Organic Growth. Cambridge: Cambridge University Press. Kachru, U., 2005. Strategic Management: Concepts and Cases. New Delhi: Excel Books India. Lamb, C., Hair, J. and McDaniel, C., 2008. Essentials of Marketing. Boston: Cengage Learning. 2008. Mack, S., n.d. What Is Organic Growth Strategy? Chron Demand Media. [online] Available at: [Accessed 25 July 2014]. Mind tools, n.d. “Bowman’s Strategy Clock.” [online] Available at: [Accessed 25 July 2014]. Mognetti, Jean F., 2003. Organic Growth: Cost Effective Business Expansion from Within. Chichester: John Wiley & Sons. Read More