Strategic Management: An Integrated Approach - Coursework Example

Strategic Management Essay Introduction An integrated approach to strategic management is an important aspect of achieving high performance in organisations because it them to understand various parts making up the organisation in order to understand the whole organisation. Achieving organisational objectives requires managers to integrate various functions within the organisation so that they can work together cohesively towards the achievement of overall organisational objectives (Kew and Stredwick, 2005). For example, the goals, objectives and strategic actions of the marketing department should be linked with those of finance department and human resource department. In this case, strategy and management play a crucial role in determining how a company delivers its products or services in the global market successfully amidst increasing competition. Therefore, the main goal of strategic management is to integrate production and value delivery globally. Strategic management theories provide various views that can be used to analyse the integrated approach to management. Those views have been categorized into either outside-in or inside-out. The outside-in approach represents a strategy by design, which focuses on the external environment. In this case organisations analyse the external environment in order to identify opportunities that boost competitive advantage and threats that destroy competitive advantage. On the other hand, inside-out approach is a resource-based view of strategy in which organisations attempt to gain competitive advantage using their distinctive capabilities. There are various theoretical frameworks of outside-in and inside-out approaches that can be analysed in order to determine which of the two approaches best represents an integrated approach to strategic management. The first step is to look at some of these frameworks. The Theoretical Frameworks of Outside-in Approach The wider environment of an organisation provides an organisation with opportunities and threats of competitive advantage. Outside the organisation there are three layers of business environment: competitors, industry and the macro environment. Each of these layers has various theoretical frameworks. Organisations may use PESTEL framework is used to analyse the macro-environment; porter’s five forces model to analyse the industry; and strategic groups to analyse competitors. Macro-environment – PESTEL When analysing the external environment using this framework, organisations seek to understand the factors that affect the organisation and which of those factors are the most important for the organisation. PESTEL represents political, economic, social, technological, environmental and legal factors. These can be illustrated in the figure below. In terms of political factors, the organisation should try to understand the level of government involvement in the economy. Some of the political factors that can be analysed include labour laws, environmental policies, trade restrictions, political stability, tariffs and tax policies. Governments have significant influence in the infrastructure and provision of merit goods that support economic exchange in the market (Kew and Stredwick, 2005). Economic factors that may affect the competitive advantage of a company in a given environment include interest rates, inflation rates, exchange rates and economic growth. These factors influence the way business operate and make strategic decisions. For instance, a company that is trying to choose a country for expansion will consider countries with high economic growth and high interest rates so that they can make higher profits from sales to that country (Stonehouse, 2004). Furthermore, exchange rates affect the costs of exporting goods and the prices of imports. Social factors that may affect the competitive advantage of an organisation include cultural and demographic aspects of the environment. They include health issues, age demography, safety issues, attitudes, population size and growth rate, and social development indices. The trends of these social factors affect the demand of products and the operations of the organisation (Stonehouse, 2004). For instance, many multinational corporations have been selling their products to China and other emerging economies due to their rising middle class with higher purchasing power and good attitude to consumer goods. Technological factors include Research and Development, technological innovations and technological change. These technological factors affect barriers to entry, efficiency of production and outsourcing decisions. Legal factors such as international laws, discrimination laws, property rights laws, health and safety regulations, and tax laws affect the operational and management decision making of an organisation (Kew and Stredwick, 2005). It also affects the costs of its products and the demand for its products. Lastly, environmental factors include weather conditions and climate change. They affect the productivity and level of activity of organisations, especially those that deal with tourism, insurance and farming (Stonehouse, 2004). The awareness of climate change affects the demand of products offered by companies in some industries such as motor and oil industries. Porter’s Five Forces Model Michael Porter provided five forces that shape competition and determine productivity in the industry. The five forces include threat of potential entry, bargaining power of buyers, bargaining power of suppliers, threat of substitutes and competitive rivalry. In terms of threat to entry, organisations need to analyse the scale and extent of barriers to entry (Grundy, 2006). The scale and extent of barriers to entry enables organisations to develop appropriate develop appropriate strategies to develop appropriate barriers for entrants, including high brand image. Organisations also need to understand the factors that prevent new entrants from entering the market. Secondly, threat of substitutes refers to the availability of products or services that offer similar products (Porter, 2008). The availability of substitute products enables customers to get alternatives. The choice of such alternatives is affected by switching costs, level of product differentiation and prices of substitutes (Porter, 2008). The buying power of customers also determines the competitive advantage of an organisation. In this case, buyers have the power to influence prices and demand high quality (Grundy, 2006). Therefore, organisations need to understand the bargaining power of customers in order to develop appropriate strategies to keep costs down and increase profits. In terms of bargaining power of suppliers, powerful suppliers may raise prices and reduce the profits of organisations (Grundy, 2006). Therefore, organisations need to understand the bargaining power of suppliers in order to make appropriate decisions regarding their cost minimization strategies. Lastly, competitive rivalry refers to the number and size of direct competitors in the market (Roy, 2009). A higher number and size of competitors leads to higher competition which reduces the competitive advantage of an organisation. The Theoretical Frameworks of inside-out Approach Resource Based View The resource based view of strategy suggests that some organisations achieve higher profits than others due to their capabilities, resources and competencies. Resources include physical resources, financial resources, human resources and intellectual capital. Physical resources include physical resources such as machines, facilities, equipment and vehicles. Financial resources include cash, debtors and capital. Some of the human resources of an organisation are skills, knowledge and personnel. Lastly, intellectual capital consists of goodwill, patents, customer databases and brands. These resources enhance higher production at lower costs as well as the development of quality products at standards costs. In terms of competences, organisations should be concerned about how they access and utilise resources. The efficiency and effectiveness of human, financial, physical and intellectual resources are affected by the cooperation between various stakeholders, innovation, management capabilities, adaptability, learning and training capabilities, and customer relationships. These are all termed as competences. When analysing the capabilities of an organisation, two types of capabilities are considered: Threshold capabilities and Dynamic capabilities. Threshold capabilities are those capabilities that are essentially necessary for competition in the market. The threshold levels for such capabilities keep changing in response to factors such as new entrants and activities of competitors. In order to achieve threshold capabilities, organisations need to develop high volumes of products. Dynamic capabilities are those capabilities that enable organisations to change their strategic capabilities to meet changing conditions within the environment. Unique resources and core competences are also important resources in the Resource-based view. Unique resources are those that cannot be imitated or obtained by competitors; hence they provide competitive advantage for organisations (Peng et al, 2009). Core competences include the mechanisms in which resources are utilized to achieve competitive advantage. Value Chain The value chain or value network is also an essential analysis tool in the inside-out approach. It enables organisations to identify the most important activities and the most profitable activities (Presutti & Mawhinney, (2013). It also enables organisations to make outsourcing or acquisition decisions. Furthermore, the tool is used to determine the best partners for the business. The value chain is composed of primary activities and support activities. As shown in the figure below, primary activities include inbound logistics, outbound logistics, service, marketing and sales, and operations. On the other hand, support activities include firm infrastructure, human resource management, technology development and procurement. Organisations need to combine these activities in its value chain in order to achieve competitive advantage (Tichá, 2001). For instance, the inbound logistics may use IT systems operated by human resources. Effective human resource management as a support activity is therefore necessary to provide good inbound and outbound logistics in order to improve the company’s internal operations and external relationships. Marketing and sales may also be supported by technology development and procurement. Analysis: Which view best represents an integrated approach, inside-out or outside-in? This section critically evaluates the above frameworks of inside-out and outside-in views in order to determine which one of them best represent an integrated approach to strategic management. It is already known that integrated approach to strategic management involves linking different functions in a harmonious manner in order to achieve common objectives. The production and delivery activities are integrated in order to create a successful strategic management approach. The inside-out view is a god approach to develop an integrated approach through shared business practices and standards. An integrated global enterprise engages in shared business and technology standards. These shared standards enable companies to choose whom to produce goods. Furthermore, shared business activities in an integrated global environment leads to outsourcing of work that was previously performed in-house (Palmisano, 2006). In this case, a company needs to understand the value chain in order to outsource work from the right sources. We have already seen that the value chain enables a business to make outsourcing decisions and determine the best partners for the business. Therefore, integrated approach in terms of shared business practices requires an inside-out approach. The integrated approach to strategic management is achieved through the spread of outsourcing. This has encouraged companies to view themselves as successful entities in terms of manufacturing, research, sales, procurement and distribution. Clearly these are the key elements of the value chain, which is a framework of the inside-out approach. In the view of integrated strategic management, a multinational corporation should combine its functions and skills in a tightly bound and loosely coupled manner. This integrates various components of production and business activity in order to produce goods and services for customers (Palmisano, 2006). Therefore, combination of various resources, capabilities and competences is an important way of achieving integrated approach to strategic management. Teece et al (1997) supports the resource-based view as a means of achieving an integrated approach to strategic management. Integration is a means of extracting rents from firm-specific assets. As resources of the company, such assets are developed through an integrated approach of strategic management in order to generate revenue. New capabilities are also developed through the resource based perspective. An integrated strategic management enhances a good control of economic resources through enhanced capabilities and competences. Integration of business activities and production also requires a combination of skills and technological capabilities. Therefore, the inside-out view that includes dynamic capabilities in the global environment can best represent an integrated strategic management approach. Integration is also considered as a key function in the internal environment of a business (McGrath, 2013). It is therefore achieved through the inside-out approach that takes great concern on the internal environment of the organisation. Organisational capabilities are essential elements for achieving an integrated approach to strategic management because they are usually combined to achieve common objectives across departments. For example, communication is a good business strategy that can only be achieved within the organisation if all functions and organisational levels are integrated. The outside-in approach also has its own advantages for the integrated strategic management approach. For instance, Teece et al (1997) argue that competitive advantage can be achieved by integrating external activities and technologies. In this case, identification of technological and other external opportunities through PESTEL analysis enables an organisation to integrate its operations in the global market in order to achieve competitive advantage. For instance, external alliances, virtual corporations, technological corporations and supplier relationships enhance effective external integration (Hill & Jones, 2012). In terms of supplier relationships, the bargaining power of suppliers as highlighted by the Porter’s five forces model is used by organisations to establish the best strategy for relating with suppliers in order to reduce costs of production and increase competitive advantage. Another way of viewing the outside-in approach as an integrated approach to strategic management is to consider an organisation or a subsidiary company as part of an integrated chain of companies in an industry. When companies conduct competitor analysis, they attempt to identify strengths and weaknesses of competitors that can be used in response to the increasingly competitive environment (Stonehouse, 2004). As a result, they may identify targets for acquisition or mergers. Conclusion The inside-out view consists of resource based approach and value chain framework. On the other hand, the outside-in view is concerned with PESTEL and Porter’s Five Forces frameworks. Integrated approach to strategic management can be achieved through combination of internal capabilities, competences and resources to achieve competitive advantage. Outside-in view is also supported a good representative of integrated approach to strategic management. Study of external environment enables an organisation to develop external integration. However, it is clear that inside-out view is the best representative of integrated approach to strategic management because it involves the largest and most important integration of strategic management – integrating capabilities, functions and competences in order to respond adequately to internal and external needs of the organisation and achieve competitive advantage. References list Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change, 15, 213-229. Hill, C.W.L., & Jones, G.R. (2012). Strategic management: An integrated approach. Mason, OH: South-Western, Cengage Learning. Kew, J., and Stredwick, J. (2005). Business Environment: Managing in a Strategic Context, London: CIPD. McGrath, R.G. (2013). Transient Advantage. Harvard Business Review, June/July 2013 Issue, 62-70. Palmisano, S.J. (2006). The Globally Integrated Enterprise. Foreign Affairs, May/June 2006. Peng, M.W., Sun, S.L., Pinkham, B. and Chen, H. (2009). The Institution-Based View as a Third Leg for a Strategy Tripod. Academy of Management Perspectives, August 2009, 63-81. Porter, M.E. (2008). The Five Competitive Forces That Shape Strategy, Harvard business Review. Presutti, W.D., & Mawhinney, J. (2013). Understanding the dynamics of the value chain. New York: Business Expert Press. Roy, D. (2009). Strategic foresight and Porters five forces: Towards a synthesis. München: GRIN. Stonehouse, G. (2004). Global and transnational business: Strategy and management. Chichester: Wiley. Teece, D.J., Pisano, G. and Shuen, M. (1997). Dynamic Capabilities and Strategic Management. Strategic Management Journal, Vol. 18:7, 509–533. Tichá, I. (2001). Resource-based approach to competitive advantage: Implications for Czech agribusiness. Mer, 3, 58-63. Read More