Achieving
competitive Advantage:
When
developing a corporate strategy, the organization must decide upon which basis
it is going to compete in its markets. This involves decisions on whether to
compete across the whole market place or only in certain segments this is
referred to as competitive scope). A further consideration is the way in which
the organization can gain competitive advantage, that is anything that gives on
organization an edge over its rivals and which can be sustained over time. To
be sustainable, organizations must seek to identify the activities that
competitors cannot easily copy and imitate (we will return to this later in
this chapter when the resource-based view to strategy is introduced).
Organizations must assess why customers chose to use
one organization over another. The answer to this question can be broadly
categories into two reasons:
1.
The
price of the product/ service is lower.
2.
The product/ service is perceived to provide
better ‘added value’.
Decisions
on the above questions will determine the generic strategy options for
achieving competitive advantage- Known as generic because they are widely
applicable to firms of all sizes and in all industries. The two types of
generic competitive strategies that enable organizations to achieve competitive
advantage are referred to as low-cost strategies or differentiation strategies.
For example, organizations can compete on price-based strategies serving prices
to sensitive segments of the market place or they can choose to purpose a
differentiation strategy which seeks to be unique on dimensions valued by
buyers, such as product design, branding, product performance and service
levels.
Strategic Direction
The
organization also has to decide how it might develop in the future to exploit
strengths and opportunities or minimize threats and weaknesses. There are
various options that could be followed, including:
n Market Penetration. This is where the organization seeks to
maintain or increase its share of existing markets with existing products.
n Product development. Strategies are based on launching new
products or making product enhancement which are offered to its existing
markets.
n Market development. Strategies are based on finding new markets
for existing products. This could involve identifying new markets
geographically or new market segments.
n Diversification. Strategies are based on launching new
products into new markets and is the most risky strategic option.
Strategic Methods
Not
only must the organization consider on what basis to compete and the direction
of strategic development, it must also decide what methods it could use. The
options are:
q Internal development. Where the organization uses it own internal
resources to pursue its chosen strategy. This may involve the building up a
business from scratch.
q Take over/acquisitions or mergers. An alternative would
be to acquire resources by taking over or margining with another organization,
in order to acquire knowledge of a particular product/market area. This might
be to obtain a new product range or market presence or as a means of
eliminating competition.
q Strategic alliances. This route often has the aim of increasing
exposure to potential customers or gaining access to technology. There are a
variety of arrangements for strategic alliances, some of which are very
formalized & some, which are much looser arrangements.
The evaluation stage considers each strategic option
in detail for its feasibility and fit with the mission and circumstances of the
business. By the end of this process, management will have decided on a
shortlist of options that will be carried forward to the strategy
implementation stage. The various options must be evaluated against each other
with respect to their ability to achieve the overall goals. Management will
have a number of ideas to improve the competitive position of the business.
Strategy implementation
The
strategy sets the broad direction and methods for the business to reach its
objectives. However, none of it will happen without more detailed
implementation. The strategy implementation stage involves drawing up the
detailed plans, policies and programmes necessary to make the strategy happen.
It will also involve obtaining the necessary resources and committing them to
the strategy. These are commonly called tactical and operational decisions:
q Tactical programmes and decisions are medium-term
policies designed to implement some of the key elements of the strategy such as
developing new products, recruitment or downsizing of staff or investing in new
production capacity. Product appraisal and project management techniques are
valuable at this level.
q Operational programmes and decisions cover routine day-to-day
matters such as meeting particular production, cost and revenue targets.
Conventional budgetary control is an important factor in controlling these
matters.
Review and control
This is a continuous process of reviewing both the
implementation and the overall continuing suitability of the strategy. It will
consider two aspects:
1.
Does performance of the strategy still put
the business on course for reaching its strategic objectives?
2.
Are the forecasts of the environment on which
the strategy was based still accurate, or have unforeseen threats or
opportunities arisen subsequently that might necessitate a reconsideration of
the strategy?
A formal top-down strategy
process
Large organizations will often formalize process of
strategy formulation. The following are typical features of the process:
1.
A designated team responsible for strategy
development: there are several groups of actors in this process:
a) A permanent strategic planning unit
reporting to top management and consisting of expert staff collecting business
intelligence, advising divisions on formulating strategy and monitoring
results.
b) Groups of managers, often the management
teams of the SBUs meeting periodically to monitor the success of the present
strategies and to develop new ones. These are sometimes referred to as strategy
away days because they often take place away from the office to avoid the
interruptions day-to-day functioning.
c) Business consultants acting as advisers
and facilitators to the process by suggesting models and techniques to assist
managers in understanding their business environments and the strategic
possibilities open to them. You will be reading about many of these models and
technique later.
2. Formal collection of information for
strategy purposes. The management team will call upon data from within
and outside the firm to understand the challenges they face and the resources
at their disposal. This information can include:
a) Environmental scanning reports complied
by the business intelligence functions within the firm, including such matters
as competitor behaviour, market trends and potential changes to laws.
b) Specially commissioned reports on
particular markets, products or competitors.
a)
Management accounting information on
operating costs and performance, together with financial forecasts.
b)
Research reports from external consultancies
on market opportunities and threats.
3. Collective decision-taking by the senior
management team. This involves the senior management team working
together to develop and agree business strategies. Techniques such as
brainstorming ideas on flip charts and using visual graphical models to
summaries complex ideas will assist this process. Also, arriving at a decision
will involve considerable conflict as particular managers are reluctant to see
their favoured proposal rejected and a different strategy adopted.
4. A process of communicating and implementing
the business strategy. This can be accomplished using a combination of
the following methods:
(a) Writing a formal document summarizing the
main elements of the plan. This will be distributed on a confidential basis to
other mangers and key investors, and also perhaps to other key stakeholders
such as labour representatives, regulatory bodies, major customers and key
suppliers.
(b) Briefing meetings and presentations to the
stakeholders mentioned above. Frequently, reporters from the business press
will be invited to ensure that the information reaches a broader public. Naturally,
the fine detail will remain confidential.
(c) The development of detailed policies,
programmes and budgets based on achieving the goals laid out in the business
strategy.
(d) The development of performance targets for
managers and staff. These ensure that everyone plays their part in the strategy
(and perhaps receiving financial rewards for doing so).
5. Regular review and control of the strategy.
Management will monitor the success of the strategy by receiving regular
reports on performance and on environmental changes. Today, the sophisticated
competitive strategies of many firms have necessitated the development of more
complex performance measurement systems to supplement traditional budgetary
control information. These are variously termed enterprise resource management
systems and balanced scorecards. There has also been an increased emphasis on
competitor and other environmental information to assist managers in steering
their businesses.
Economic
Profit
Both sets of strategy writers take an economic view of
competitive advantages, seeing it as something enabling the firm to generate a
superior return on shareholders’ investment through time.
Economic
Profit is essentially the excess of the firm’s earnings over the opportunity
costs of the capital it employs. In other words, for an economic profit to be
recorded, the returns to the shareholder must exceed the rate of return the
shareholder could have obtained by investing the same funds in the next best
alternative.
For
example, consider this simple investment situation:
Marsh Hall
plc has net assets of Rs. 520 lakhs. Its profits last year were Rs. 62. lakhs.
Its direct rival Jevons plc has net assets of Rs. 780 lakhs and earnings of Rs.
70.2 lakhs. Advise the investors in Marsh Hall plc and jevons plc on the
economic performance of the firms. We need to calculate the economic profit
earned by the two firms:
q
Marsh Hall plc is making a return on net
assets of 12% (Rs. 62.4/ Rs. 520).
q
Jevons plc is making a return on net assets
of 9% (Rs. 702/ Rs. 780).
q
Investors in Marsh Hall plc are therefore
enjoying a positive economic profit of Rs. 15.6 lakhs, calculated as (12%- 9%) ´520 lakhs. In other
words, they are Rs. 15.6 lakhs better off by investing in Marsh Hall plc than
if they had invested in the next-best alternative, Jevons plc.
q
Investors in Jevons plc are suffering a
negative economic profit of Rs. 23.4 lakhs (i.e. 3% of Rs. 780 lakhs) because
they chose not to invest in Marsh Hall plc.
Investors
should switch their investments from Jevons plc to Marsh Hall plc to gain a
better return. The effect of this would be to reduce the share price of Jevons
plc and raise the share price of Marsh Hall plc. The market value of Jevons plc
would fall and the market value of Marsh Hall plc will rise. In a simple way
this illustrates the link between economic profit and shareholder value.
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