CHAPTER 8: FORMULATING BUSINESS a lower cost structure or a differentiated
LEVEL STRATEGY product. A firm positions itself in its industry
through its choice of low cost or
PORTER'S COMPETITIVE STRATEGIES differentiation.
M E Porter studied a number of business
organisations and proposed that Value Creation- The firm creates value by
business-level strategies are the result of performing a series of activities that Porter
five competitive forces in the company's identified as the value chain.
environment. According to Porter, buyers,
product substitutes, suppliers and potential FEATURES OF COMPETITIVE
new companies within the industry all ADVANTAGES
contribute to the level of rivalry among Not Sustainable for Long: It is not always
industry firms. Understanding the forces that possible for companies to sustain individual
determine competitiveness within an sources of competitive advantage for long
industry should help managers develop (rivals copy and do everything possible to
strategies that will enable individual wipe out the edge through their own
companies within the industry to be more innovations).
competitive. Relevant Advantage: In order to implement
the chosen strategy, a firm must have the
Cost Leadership- Cost leadership is a relevant competitive advantage.
strategy that focuses on making an Backbone of Strategy: A successful strategy
organisation more competitive by producing is always built around the competitive
its products more cheaply than competitors advantage. Without such a distinct
can. advantage, it is not possible to achieve
Differentiation Strategy- A competitive corporate objectives successfully.
strategy based on providing buyers with
something special or unique that makes the Integration: Integration could be horizontal
firm's product or service distinctive. (adding one or more businesses that are
Focus- It is a strategy that emphasises similar usually by purchasing such
making an organisation more competitive by businesses) or vertical (called as backward
targeting a specific regional market, product integration;
line or buyer group. Research and Development: Research
and development is responsible for
RESOURCES AND CAPABILITIES producing unique ideas and methods that
According to the resource-based view, in will lead to new and improved products and
order to develop a services.
competitive advantage the firm must have Barriers to Entry: Obstacles to entering an
resources and capabilities that are superior industry. The major barriers include
to those of its competitors. economies of scale, product differentiation,
capital needs, access to distribution
COST ADVANTAGE AND channels, cost leadership, government
DIFFERENTIATION ADVANTAGE policy etc.
Competitive advantage is created by using Benchmarking: The process of finding the
resources and capabilities to achieve either best available product features, processes
and services and using them as a standard could be an important factor in determining
(benchmark) for improving a company's own a firm's cost advantage.
products, processes and services. Focus Strategy: It is a strategy that
value chain approach: identifies nine emphasises making an organisation more
strategically relevant activities that create competitive by targeting a specific regional
value and cost in a specific business. market, product line or buyer group.
Strategic Business Unit (SBU) Structure:
Firms can also achieve competitive A number of Indian companies have
advantage by dividing their operations into adopted the focus strategies either on the
separate strategic business units. basis of lower cost or differentiation quite
successfully in recent times:
ACQUIRING CORE COMPETENCE •Ayur Herbal Brand: •Anchor toothpaste
Firms can acquire core competence through •Ayurvedic Brand
heavy investments in technology, research •'T' Series Cassettes:
and development followed by new product
innovations. Hammel and Prahalad Before exploiting such gaps, one should pay
Core Competence: It is a unique strength attention to the following:
that gives a firm access to important market • Uniqueness:
segments, offers significant •Size
benefits to customers in the end products •Ignored by the big
and is difficult to copy. •Resources
Lower Cost Leadership Strategy: A •Superiority
competitive strategy based on the firm's
ability to provide products or services at SUMMARY
lower cost than its rivals. Culture: A system of shared values and
Economies of Scale: Large established beliefs that produce norms of behaviour.
firms produce, sell and advertise in greater Innovation: It is a new idea applied to
volume than smaller firms and late entrants. initiating or improving a process, product or
Experience Curve Effects: The principal service.
source of experience based cost reduction Leadership: The capacity to secure the
is learning by organisation members. As cooperation of others in accomplishing a
employees repeat activities, they learn how goal.
to carry them out more quickly and Niche Marketing: Focusing on sub
accurately. segments or niches with distinctive traits
Vertical Integration: Extending control over that may seek a special combination of
sources of supply (upstream operations) is benefits.
vertical integration. High levels of vertical Power: The ability, apart from functional
integration which can be achieved by fairly authority or control over resources or
large firms, help firms control all of the rewards, to influence the behaviour of other
inputs, supplies and equipment required to Pragmatism: The ability to make things
convert raw materials and equipment into happen and achieve positive results.
finished products. Product Innovations: A firm's activities that
Location of Activities: The actual location enhance the differentiation of its products or
where a value-added activity is carried out services.
CHAPTER 9 STRATEGIC MANAGEMENT RELEVANCE
A resource or capability must be relevant to
RESOURCES OF THE FIRM the key success factors in the market.
It is important to distinguish between the British coal mines produced some wonderful
resources and the capabilities of the firm: brass bands.
resources are the productive assets owned
by the firm; capabilities are what the firm SUSTAINING COMPETITIVE ADVANTAGE
can do. Individual resources do not confer The profits earned from resources and
competitive advantage, they must work capabilities depend not just on their ability to
together to create organisational capability. establish competitive advantage, but also
It is capability that is the essence of superior on how long that advantage can be
performance. sustained. This depends on whether
resources and capabilities are durable and
TANGIBLE RESOURCES whether rivals can imitate the competitive
Tangible resources are the easiest to advantage they offer. Resources and
identify and evaluate: financial resources capabilities are imitable if they are
and physical assets are identified and transferable or replicable.
valued in the firm’s financial statements.
Durability
INTANGIBLE RESOURCES Some resources are more durable than
intangible resources are more valuable others and, hence, are a more secure basis
than tangible resources. Yet, in company for competitive advantage.
financial statements, intangible resources
remain largely invisible – particularly in the Transferability
US where R&D is expensed. The simplest means of acquiring the
resources and capabilities necessary for
HUMAN RESOURCES imitating another firm’s strategy is to buy
The human resources of the firm are the them.
expertise and effort offered by its
employees. Human resources do not Replicability
appear on corporate balance sheets for the If a firm cannot buy a resource or capability,
simple reason that people are not owned: it must build it. In financial services, most
they offer their services under employment innovations in new derivative products can
contracts. Identifying and appraising the be imitated easily by competitors.
stock of human resources within a firm is
complex and difficult. RELATIONSHIP BETWEEN RESOURCES
AND CAPABILITIES
SCARCITY Possibly the most difficult problem in
If a resource or capability is widely available developing capabilities is that we know little
within the industry, then it may be essential about the linkage between resources and
to compete, but it will not be a sufficient capabilities. In most sports, the relationship
basis for competitive advantage. between the skills of the individual players
and team performance is weak.
periods, then acquiring a company that has
Concentrating resources already developed the desired capability
through the processes of converging can short-circuit the tortuous process of
resources on a few clearly defined and capability development. In technologically
consistent goals; focusing the efforts of fast-moving environments, established firms
each group, department, and business unit typically use acquisitions as a means of
on individual priorities in a sequential acquiring specific technical capabilities.
fashion; and targeting those activities that
have the biggest impact on customers’ Accessing Capabilities
perceived value. Strategic Alliances: Given the high cost of
acquiring companies, alliances offer a more
Accumulating resources targeted and cost effective means to access
through mining experience in order to another company’s capabilities.
achieve faster learning, and borrowing from
other firms – accessing their resources and Creating Capabilities
capabilities through alliances, outsourcing Creating organisational capability requires,
arrangements, and the like. first, acquiring the necessary resources and,
second, integrating these resources.
Complementing resources
involves increasing their effectiveness Competitive Advantage
through linking them with complementary Superiority gained by a firm when it can
resources and capabilities. This may involve provide the same value as its competitors
blending product design capabilities with the but at a lower price, or can charge higher
marketing capabilities needed to prices by providing greater value through
communicate these to the market, and differentiation. Competitive advantage
balancing to ensure that limited resources results from matching core competencies to
and capabilities in one area do not hold the opportunities.
back the effectiveness of resources and
capabilities in another. Internal Environment
Conditions, entities, events, and factors
Conserving resources within an organisation which influence its
involves utilising resources and capabilities activities and choices, particularly the
to the fullest by recycling them through behaviour of the employees.
different products, markets, and product
generations; and co-opting resources Mission Statement
through collaborative arrangements with Written declaration of a firm’s core purpose
other companies. and focus which normally remain
unchanged, whereas business strategies
APPROACHES TO CAPABILITY and practices may frequently be altered to
DEVELOPMENT adapt to the changing circumstances.
Acquiring Capabilities Organisational Capability
Mergers and Acquisitions: If new Ability and capacity of an organisation
capabilities can only be developed over long expressed in terms of its (1) Human
resources: their number, quality, skills, and • Product leadership
experience, (2) Physical and material • Customer intimacy (also referred to as
resources: machines, land, buildings, (3) customer solutions).
Financial resources: money and credit, (4)
Information resources: pool of knowledge, Financial Strategies
databases, and (5) Intellectual resources: Organisations need to determine their plans
copyrights, designs, patents, etc. and strategies around revenues and costs.
Financial strategies fall into three main
CHAPTER 10: FORMULATING areas:
FUNCTIONAL STRATEGY • Revenue growth
• Productivity
CONVERTING STRATEGY INTO Asset utilisation.
ACTIONS
Functional strategies deals with a Customer Strategies
relatively restricted plan designed to Once the financial strategy has been
achieve objectives in a specific functional determined, the organisation needs to make
area, allocation of resources among formal plans and strategies. which can be
different operations within that functional split into three main areas:
area and coordination among different •Retaining and adding customers
functional areas for optimal contribution to • Increasing revenue per customer
the achievement of business and corporate •Reducing cost per customer
level objectives.
Execute through the Internal Perspective
Specify an Overriding Objective Strategies- The organisation must establish
The first step is about linking the strategy the actions that will realise its plans and
map to the creation or reaffirmation of the strategies to win market share. The
organisation's mission, core values and organization must draft a plan to execute
vision. It must distinguish between the the “story” that has been developed so far.
organisation's overriding objective and its
strategies. Plan the Learning and Growth
Strategies- Once the financial and
Value Proposition customer strategies are established and an
If an organisation wants to be a market execution plan devised, the orgnaisation will
leader, it must know what its customers almost certainly find gaps in the knowledge,
value. Once it has this information, the skills, and abilities it needs.
organisation can re-focus its efforts to
provide value drivers better than its rivals. ROLE OF LEADERS IN FUNCTIONAL
The organisation then chooses the value LEVEL STRATEGIC MANAGEMENT
proposition to help it win market share. It With the global economic downturn and
should refer to the three value propositions tighter market competition, business leaders
for competing in the market: must develop innovative strategies that will
keep their organisations profitable and in
• Operational excellence (also known as some cases survive.In order to successfully
best total cost) implement their strategies, CEOs and
high-level executives must gain the support ORGANISATIONAL DESIGN- "To gain the
of their organisations. necessary insights, leaders must conduct
in-depth research within their organisations
LOOPING STRATEGIES WITH TACTICAL to find out what has worked in the past and
TOOLS- Before executing a plan of action, why." To gain the necessary insights,
leaders must know how they can be most leaders must conduct in-depth research
effective and creditable within their within their organisations to find out what
organisation, how they personally function has worked in the past and why.
as leaders and how they can best influence
others to gain support and commit to their STRATEGY ALIGNMENT- It is important
strategies. that when leaders develop their strategy
that it is aligned to the culture of the
GATHERING AND SHARING company. An example is an organisation
INFORMATION- With the economy and that has a long history of producing
markets changing at warp speed, leaders high-end, quality products but in a difficult
must know how to generate a steady flow of economy needs to reduce expenses.
reliable information to help keep track of
industry trends, changing customer needs MAKING IT WORK- Strategy execution is a
and product cycles. complex process that cannot be taken
lightly. Every strategy is different and will
GOALS- When leaders only establish one require a unique execution plan of action
goal of increasing sales or profits, they are that will align the strategy to the
setting themselves up for execution failure. organisation's culture, processes and
Goal setting needs to be done by using a structures.
step-by-step process that creates clear,
understandable and obtainable short- and STRUCTURAL DESIGN
long-term objectives that will produce the Functional structure in the Functional level
best strategy execution results. strategy formulation is most often called
structural design.
COMMUNICATION- The flow and type of
information communicated will play a FUNCTIONAL STRUCTURE
significant role in how successful leaders Functional structures are typically highly
will be in implementing their ideas hierarchical; hence they inherit the
throughout their organisations. properties of hierarchical structure.
•Maximises Functional Performance: All
ACCOUNTABILITY AND MEASURING the human knowledge, skills and
PROCESSES- Leaders must put in place infrastructure required for a particular
systems for how managers will be evaluated functional activity are consolidated in a
and held accountable for their execution single sub-organisation, this facilitates
performance. The systems should include a sharing of valuable expertise by superiors
reward structure and what management with their subordinates.
practices are required to obtain such •Cultivates Specialists: This type of
rewards. structure promotes career development of
individuals aspiring to be technical
specialists of their field in large
organisations. RESPONSIBILITY- Everyone within the
organisation has some role in controls. The
Weaknesses of funtional structure: roles vary depending upon the level of
•Restrictive Organisational View responsibility and the nature of involvement
•Slow response by the individual.
•Poor Accountability
Most Effective Condition: ELEMENTS OF INTERNAL CONTROL-
•Small/medium size or few products Internal control systems operate at different
•Stable External Environment levels of effectiveness. Determining whether
a particular internal control system is
PRODUCT DIVISIONAL STRUCTURE effective is a judgement resulting from an
In a divisional structure, the teams are assessment of whether the five components
organised in set of divisions, where each Control
division corresponds to the end product or Environment, Risk Assessment, Control
services provided by the organisation. Activities, Information and Communication
and Monitoring - are present and
Strength of divisional structure: functioning. Effective controls provide
•Clear Accountability reasonable assurance regarding the
•Departmental Coordination accomplishment of established objectives.
•Broader Skills development
•Unstable Environment Control Environment- The control
Weaknesses: environment, as established by the
•Resource duplication organisation's administration, sets the tone
•Inhibits Career Growth of Specialists of the organisation and influences the
•Divisional affiliations control consciousness of its people.
•Difficult Product Integration Control environment factors include:
• Integrity and ethical values;
INFORMATION AND CONTROL SYSTEM • The commitment to competence;
Information and controls are to be an • Leadership philosophy and operating style;
integral part of any organisation's functional •The way management assigns authority
level strategies. The information system of and responsibility, and organises and
the organisation should be up to date as it develops its people;
should have complete knowledge about the • Policies and procedures.
market trends and its close competitors.
Risk Assessment- Every entity faces a
•Protecting its resources against waste, variety of risks from external and internal
fraud, and inefficiency; sources that must be assessed.
•Ensuring accuracy and reliability in Control Activities- Control activities are the
accounting and operating data; policies and procedures that help ensure
•Securing compliance with the policies of management directives are carried out.
the organisation; and •Evaluating the level
of performance in all organisational units of Information and Communication-
the organisation. Pertinent information must be identified,
captured and communicated in a form and Ethnocentrism: Belief in the superiority of
time frame that enables people to carry out one's own ethnic group.
their responsibilities. Geocentricism: Relating to, measured
from, or with respect to the centre of the
Monitoring- Control systems need to be earth.
monitored - a process that assesses the Newsletter: A printed report giving news or
quality of the system's performance over information of interest to a special group.
time. Polycentrism: Having many centres,
especially of authority or control.
SUMMARY Strategy: The art or skill of using
Functional-level strategies are concerned stratagems in endeavou uch as politics and
with coordinating the functional areas of the busines:
organisation (marketing, finance, human
resources, production, research and
development, etc.)
concerned with:
(a) Efficiently utilising specialists within the
functional area.
(b) Integrating activities
within the functional
area
(c) Assuring that functional strategies mesh
with business-level strategies and the
overall corporate-level strategy.
Accountability is also easiest to establish
with functional
strategies because results of actions occur
sooner and are more easily attributed to the
function
Corporate-level strategies involve top
management and address issues of
concern to the entire organisation.
Business-level strategies deal with major
business units or divisions of the corporate
portfolio. Business-level strategies are
generally developed by upper and
middle-level managers
Functional strategies address problems
commonly faced by lower-level managers
and deal with strategies for the major
organisational functions
Market definition is thus the domain of
corporate-level strategy, market navigation
the domain of business-level strategy,
