The Strategic Success of Contemporary Organisations - Literature review Example

Strategic Management Today: Evaluating Competitiveness in a dynamic Market Name: Tutor: Course: Date: Strategic management today: Evaluating competitiveness in a dynamic market Introduction Modern organizations are utilizing the various concepts and perspectives of strategic management to expand their market share and profitability. Strategic management success is the continual stream of effective decisions that match the objectives and external environment of an organization (Porter, 2008). Every organization has corporate, business and functional goals intertwined with culture and values to deliver performance. The strategic success of any organization depends on their ability to evaluate strategies, analyze the industry, and resources and capabilities, as well as their organizational structure (Barney, 2007). To compete globally, an organization needs to have an organizational purpose, mission, vision and values. Organizational structure and strategic control allow for specialization, coordination, and cooperation. Organizational structures can be bureaucratic, functional and matrix structures and affects strategic choice and competitive advantage (Daniels & Krug, 2008). Firms intending to enter international markets reconcile specialization cooperation and coordination and by understanding organizational design and hierarchy. Palmer and Hardy (2000) suggest that formulations of strategies are triggered by profit-maximizing motives and deliberate quest to utilize a rational planning process. In this essay, some companies including Renault are focused on areas of strategic management such as corporate governance, resources and capabilities, competitive advantage, strategies, and strategic control. The aim of this essay is to comment on strategic management areas considered as critical to the strategic success of modern organizations. 1. Organizational strategies and corporate governance Grant et al. (2013) observes that contemporary organizations are facing major challenges of responding to technological changes and increasing competition. Many firms are now formulating strategies to take advantage of weaknesses of their competitors and increase resource capabilities in meeting customer needs and expectations. According to Burgelman (1983), a strategy is a theory of reasons regarding past and current organizational success. Strategies can be emergent or planned in response to the organizational investment of resources and environmental changes. Multinational corporations employ global strategies in addition to corporate, business and functional level strategies espoused in national firms (Jacobides, 2010). Companies would want to enjoy sustained competitive advantage for a longer period hence the need to develop assets and internal process in the form of core competencies. It shows that firms need a strategy process that results in innovation and creativity for effective competition. Nidumolu, et al. (2009) argues that organizational goals are driven by strategic objectives so that appropriate strategies are justified and inappropriate ones rejected. Objectives reflect on achievements of senior management, industry conditions, organizations purpose and key stakeholders. Corporate governance defines controls and development process of strategic decisions (Palmer & Hardy, 2000). Firms have governing boards, shareholders, senior managers and other corporate stakeholders who operate in a way to avoid conflicts and equally distribute power. Governance thrives with the presence of strategic objectives such as sustainability and corporate social responsibility (Davies, 2000). In the former, Adner and Zemsky (2006) note that sustainability is not only about the continued success of an organization but also involves compensating pollution production and operating on clean processes. It shows that there is the need for direct remedial action on market-based systems and carbon certificates on greenhouse gasses control. Regarding corporate social responsibility, Kleine and Hauff (2009) argue that firms’ impact society through their operations thus, they need to support communities in terms of benevolent activities. Organizations are called upon to behave ethically and make a positive contribution to the quality of life of the workforce and their families, and to the economy of the nation (Monks & Minow, 2008). Organizational strategies are considered at three levels namely corporate, business level and functional strategies (Harrington, et al. 2004). Firstly, corporate strategies represent broader level and scope of operations, business types, and activities. Companies that need to woo investors at a corporate level are often listed on stock exchanges. Secondly, business level strategies accrue to organizations competing on particular markets. For example, a company like Siemens would want to maximize particular sectors such as mobile phones, medical equipment, computer hardware manufacturing, information services, and electricity by engaging multiple business unit strategies. Thirdly, functional level strategies develop and coordinate resources for efficient and effective use at the business level (Hamel, 2009). The concern of these strategies is to allocate and organize resources and organizational parts towards creating specific competitive advantages at the business level. Competitive advantage can result from responsiveness to change and innovation or new game strategies. 2. Tools of strategy analysis Creating value for stakeholders begins with the development of strategic goals. The economic value of a firm is derived from shareholder value, internal operations, and other stakeholders in environmental, social and employment contributions (Porter, 1985). Porter (2008) suggests that the main strategic goal of most firms is profitability and the reasons for profitability as a goal are two-pronged. Given the dynamics of the competitiveness of companies, speed of change in imitating or innovating is vital as industry leaders always attempt to erode the competitive advantage of competitors. Firstly, profitability confidently measures performance of different companies and it is reasonably easier to measure. This is also a requirement for the stock exchanges and shareholders. Secondly, profitability serves as performance indicators for company survival, the convergence of stakeholders’ interests and a market for corporate control (Porter, 2008). Profitability can be measured by ratios such as gross margin, return on assets (ROA), operating margin, and return on equity (ROE), and return on capital employed (ROCE). Profitable organizations are urged to develop business ethics and organizational values such as passion, integrity, honesty and ownership among others (Prahalad & Hamed, 1990). On business ethics, adopting certain ethical positions consistent with the culture and expectation of organizational stakeholders is important (Monks & Minow, 2008). These include corporate social responsibility, as mention earlier, and strategic philanthropy. Therefore, companies need to interrelate revenue generation, performance, survival and sustainability for long-term success. Industry analysis involves several frameworks developed to assess the internal and external environment of an organization (Yunggar, 2005). Large scale changes occur in the broader environment that demands changes in the organization while smaller changes affect the microenvironment such as new market entrants, customers, suppliers and competition (Porter, 2008). In analyzing the environment of Renault Company, PESTLE framework is used to analyze its external environment while Porters five forces model is used to assess its micro-environment. PESTLE analysis considers the industry environment such as suppliers, competitors and customers by investigating their political conditions, national economy, socio-cultural factors, technology, natural environment and legal conditions (Smith, et al. 1997). In the other hand, internal resources and knowledge available to the firm are important to understanding their competitive advantage. Porters’ five forces look into industry competitors by evaluating the role of buyers, potential entrants, substitutes, and suppliers (Porter, 2008). SWOT analysis is another tool that measures the internal strengths and weaknesses of the firm as well as the prevailing opportunities and threats in the external environment (Panagiotou, 2003). Moreover, to analyze the impact of environmental events in organizational future, scenario planning is appropriate. While describing the industry structure, it is important to define industry boundary, industries, and markets. Competitors are analyzed for three reasons (Jacobides, 2010). One, it is to obtain their future decisions and strategies. Two, it makes it possible to predict their likely reactions to strategic initiatives of the organization. Three, their behavior can be determined and influenced to make it more favorable. Porter developed a framework for competitor analysis and predicting competitor behavior by looking at the strategy, objectives, assumptions, and resources and capabilities (Porter, 2008). 3. Firm resources and capabilities Hamel and Prahalad (1989) assert that industry participants compete for competitive advantage through funding, attracting customers and being perceived as having greater value. Moreover, Thompson and Strickland (2010) agree that the external environmental analysis is determined by the attractiveness of an industry and understanding the nature of competition through key success factors. Product features and organizational characteristics are two factors considered in identifying key success factors. Organizational characteristics specifically respond to the impact of substitutes and new market entrants, the negative impact of suppliers, competitive behaviors of rivals and macro-environmental factors (Porter, 1980). Resources and capabilities when utilized in a sustained and creative manner will create value for customers and superior performance to the organization (Helfat & Winter, 2011). A firm needs to target certain market segments divided along customers’ tastes, preferences, and expectations. For example, Renault needs to understand the needs of long-haul transporters, luxury driving, warehouse operations, and construction works to originate their products (Brandon, 2014). Chan Kim and Mauborgne (2005) suggest that effective market segmentation is done by identifying demographic factors, socioeconomic factors, geographic factors, psychological factors, perceptual factors and consumption patterns. Bases of competitive advantage within segmented markets include price, product features, quality, availability, image and bundling (Hamel, 2009). There is a need for a firm to understand its activities from materials stage to the end customer. Firms need to continuously re-invent or innovate to sustain their competitive advantage. According to Prahalad and Hamed (1990), ‘roots of competitiveness’, the foundation for strategy and sources of new products are potential for capabilities. For example, Honda Motor Company since its inception in 1948 has never been identified as a motor vehicle or a motorcycle company. The capability has always been centered on manufacture and development of engines and successfully carried to the development of various petrol-engined products. Resource-Based View is of the opinion that firms exploit the differences and their uniqueness and not simply by positioning or selecting the industry (Palmer & Hardy, 2000). Therefore, under resource-based view, a company requires selecting a strategy that will exploit its key strengths and develop its resources and capabilities. Companies pursue international strategies to enjoy national differences, scale economies, and scope economies. In unrelated diversification, a company achieves competitive advantage by economies through scope, skilled and clever corporate managers, exploitation, and market power (Teece, 2010). A company has three principal resources types (Barney, 2007). These are tangible resources, intangible resources, and human resources. On the other hand, capabilities are capacities for a firm to deploy resources into achieving a specific result. Functional and value chain analysis are the two approaches used to disaggregate and classify the activities of a company. For example, Renault has capabilities in continuous improvements in operations while Nokia scores high in design capabilities. Evaluating competitive resources and capabilities is done using the VRIO framework (Barney, 1991). The framework builds on sustained competitive advantage and particular company resources based on four components such as value, rarity, imitability and organization (Benkler, 2007). Returns to competitive advantage depend on efforts and skills of employees normally not owned by the company (Daniels & Krug, 2008). This remains a continuous threat to company’s competitive advantage as it cannot control employee mobility, know-how, and human ingenuity. 4. Firm’s competitive advantage Competitive advantage is the competitive edge a company enjoys in providing stable returns than its competitors. Chen, et al. (2010 argues that companies survive because of competitive and those that do not are edged out of the market. For example, Renault has a competitive advantage of making cars while Microsoft has the advantage in making computer software. Competitive advantage emerges from external and internal sources of change (Simon, et al., 2010). In external sources of changes, the company will respond to changes in customer demand, changes in prices and changes in technology. Regarding internal sources of change, some firms will have greater innovative and creative capability (Zand, 2009). The conditions for competitive imitation include identification, the incentive for imitation, diagnosis and resource acquisition (Panagiotou, 2003). To be profitable, a company establishes competitive advantage then sustains the advantage in an imperfect competition (Barney, 2012). Common markets are trading markets and production markets. In trading markets, imperfect information availability and transactional costs such as cost minimization and insider trading are opportunities for competitive advantage. In production markets, barriers to imitation and innovation such as deterrence, resource immobility, and causal ambiguity are opportunities for competitive advantage (Kim, et al. 2005). For example, Lenovo’s competitiveness in developed markets of Europe and America was eroded by the financial crisis and forced to restructure and expand to China. Barney (2007) observes that the emergence of sustained competitive advantage is favored by certain industry conditions such as information complexity, opportunities for preemption and deterrence, and difficulties of resource acquisition. Moreover, industry life cycle favors the development of a product enjoying dominance in stages of introduction, growth, maturity and decline (Burgelman, 1983). Nonetheless, competitive advantage in mature industries shifts opportunities from differentiation to cost-based factors, and reduces opportunities for establishing competitive advantage (Porter, 2008). The cost advantage of such firms is that they enjoy economies of scale, low overheads, and low-cost inputs. Companies that intend to expand to overseas markets adopt global-level strategies through activities such as foreign direct investment, joint ventures, licensing and exporting (Zand, 2009). At network-level strategy, companies define their interrelationships with other companies by getting involved in trade associations, strategic alliances, and joint ventures. For example, Renault Company in 2007 entered the Indian market through a joint venture with Mahindra & Mahindra but high pricing and dated looks of its Sports-Utility Vehicle (SUV) Duster failed to excite the Indian customers. In response to this failure, the company decided to employ a different global-level strategy of foreign direct investment. The company set up a Rs 4,500 crore factory in partnership with Nissan Motor Company in Oragadam near Chennai (Julien, 2008). Consequently, the SUVs were able to gain a 23 percent market share in a year and make the Duster model a success. Production of the product also increased from seven to 20 per hour (Holloway, 2014). By doing so, the company was able to extend its customer base, innovate and learn, develop efficient operations and flexibility. Conclusion Contemporary organizations recognize three broad areas that are important in strategic management. These areas include strategies and corporate governance, competitive advantage, and industry analysis. Under strategies and corporate governance, the essay found that companies such as Renault have specific values, mission as well as corporate, business-level and functional strategies to enable it compete favorably with other vehicle manufacturers. On competitive advantage, companies respond to customer demand and establish competitive advantage then sustains the advantage in an imperfect competition. In addition, an emergence of sustained competitive advantage is favored by certain industry conditions such as information complexity, opportunities for preemption and deterrence, and difficulties of resource acquisition. Regarding industry analysis, common tools such as PESTLE, VRIO, SWOT and Porters five forces are used to assess resources and capabilities utilized by a firm for a sustained competitive advantage. Although key success factors do not represent all potential sources of competitive advantage, their behaviors result in a competitive advantage to firms. In addition, ability to manage operating costs and having superior skills better than the competition are other sources of competitive advantage (De Wit & Meyer, 2005). The essay establishes that micro and macro- environmental analysis, the pursuit of competitive advantage and assessment of strategies, missions and goals are strategic areas that contemporary organizations consider critical. Reference list Adner, R & Zemsky, P 2006, A demand-based perspective on sustainable competitive advantage, Strategic Management Journal, vol. 27, no. 3, p. 215–239. 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