Chapter 6: Strategic Management, Competition, and Marketing

Strategic Management

Historical Development of Strategic Management

Strategic thinking is taking a long-term perspective and seeing the big picture, consisting both the organization and its competitive environment, and thinking how these fit together. Thus, there is a positive relationship between strategic thinking and performance.

There is a consensus between scholars that strategy began to be related with businesses during 1960s.

Chandler (1962, p.13) explains strategy as “the determinator of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals”. Although ‘long-term plan’ is usually repeated while defining strategy, these two terms are not synonymous. Strategies need to change over time as they need to fit business’s environmental conditions, and to remain competitive. Thus, they involve long-term business attempts for reaching a preferred future state through adaptation of its competitive position since the circumstances of business alter(Wilson and Gilligan, 2005, p.29).

Accordingly, in 1970s and 1980s, with the works of Mintzberg a new approach, called “strategic process”, to strategic management was developed. These works triggered scholars to research the process of strategy development. During 1980s, especially the works of Porter altered the research in the field, and put competition rather than planning in the centre of strategic thinking. In 1984, Wernerfelt proposed that the resources and capabilities of firms are also important for creating competitive advantage, and Barneybuilt upon this perspective afterwards. Thus, within 1980s and 1990s, scholars in the field worked on creating a theoretical foundation and framework.

Strategic Management And Planning

The concept of strategic management is important for companies. The first reason for this is related to its aim of integrating other business functions. As there are several diverse divisions, units, and functions there is a need to coordinate these, and help them focus on organization’s goals, and strategic management process does this. Second reason is its impact on organizational performance. Due to diverse strategies, companies succeed or fail. Third reason is the fact that every organization operates in a changing environment or faces with changing situations. Strategic management process helps managers and thus, organizations to deal with these fluctuating conditions or uncertain environment. Fourth reason of the importance of strategic management is that it is included in several managerial decisions.

As the quotations state, Strategic Management is what managers do for creating organization’s strategies. It is explained as “the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives”. Moreover, it is also described as “the deployment and implementation of the strategic plan and measurement and evaluation of the results”, thus it is a continuous process. This means it helps organizations to develop a plan of action for allocating resources, dealing with environment, and creating competitive advantage, as well as achieving goals and as a result, strategic thinking and planning has an impact on business performance and its success financially.

For long-run survival and growth, businesses need a game plan. Therefore, strategic planning process is developed with an aim to create and sustain a strategic fit between business goals, their capabilities and changing environment and opportunities

For strategic planning to be effective;

1. It should be a people process more than a paper process.
2. It should be a learning process for all managers and employees.
3. It should be words supported by numbers rather than numbers supported by words.
4. It should be simple and nonroutine.
5. It should vary assignments, team memberships, meeting formats, and even the planning calendar.
6. It should challenge the assumptions underlying the current corporate strategy.
7. It should welcome bad news.
8. It should welcome open-mindness and a spirit of inquiry and learning.
9. It should not be a bureaucratic mechanism.
10. It should not become ritualistic, stilted, or orchestrated.
11. It should not be too formal, predictable, or rigid.
12. It should not contain jargon or arcane planning language.
13. It should not be a formal system for control.
14. It should not disregard qualitative information.
15. It should not be controlled by “technicians”.
16. Do not pursue too many strategies at once.
17. Continually strengthen the “good ethics is good business” policy.

To understand strategic planning, one should understand the structure of a corporation. Most corporations have three levels of strategy (corporate, business, and functional levels), therefore strategic planning is done in all these levels.

Corporate Level Strategic Planning

The best business portfolio creates a perfect fit with company’s strengths and weaknesses, as well as the opportunities in the environment. Portfolio analysis involves two steps: (1) Analysis of the current business portfolio and (2) Developing strategies for growth.

The first step is to identify strategic business units (SBUs) which are key businesses (e.g. company division, product line within a division, a product or brand) making up the company29. Then the aim of the company is to find out the attractiveness of each SBUs, as it needs to decide how much support will be given. One of the bestknown portfolio-planning methods is The BCG Growth-Share Matrix30 which is developed by Boston Consulting Group.

The BCG Growth-Share Matrix:

GrowthShare Matrix is a portfolio planning method evaluating strategic business units of a company in terms of their market growth rate (expressing the attractiveness of the market) and relative market share (expressing company’s strength in the market), and according to the matrix, SBUs can be classified as Stars, Cash Cows, Question Marks or Dogs.

Stars are likely to have higher market share and are highgrowth businesses or products, thus they are likely to be market leaders. To finance this growth, they also need higher investments. For instance, iPhones and Galaxy Notes are stars for Apple, and Samsung.

Cash Cows are creating a lot of cash since it enjoys economies of scale and higher profit margins. They also need less investment to sustain their market share.iTunes is an example to a cash cow. Question Marks need a lot of cash to sustain their position in the market as they have low relative market share, therefore managers need to decide if it is profitable to invest in these question marks.(Mac computers)

Dogs may generate enough cash to sustain themselves or losses as they have weak market shares in low-growth markets. In this quadrant, managers should consider if they are holding onto these dog products/businesses.(iPod)

After analysis of the current business portfolio, company may have a broader direction with three main corporate strategies which are growth, stability, and renewal. With growth strategy, managers pursue expanding organization’s businesses such as increasing the number of products they produce or markets which these products are distributed. Stability strategy means the lack of a change. Renewal strategy is developed to demonstrate organizational weaknesses which lead to declines in performances, therefore managers try to reduce costs by for instance restructuring their operations.

Development Strategies for Growth

After analysis of the current business portfolio, company needs to evaluate if there is any opportunity to improve the existing businesses’ performances, and if there are new businesses or products since a business should constantly grow and change. Ansoff’s “The Product/Market Expansion Grid” is one of the most useful tools, which creates a planning technique to evaluate firm’s growth through product and market extension networks.

With this matrix, a company first evaluates if it is possible to gain more market share with its existing products within existing markets which is called as market penetration strategy . Second, company examines if it is possible to find new markets for its existing products which is market development strategy . Third, a company considers if it could develop new products for its existing markets which is named as product development strategy . Lastly, a company may choose to use diversification strategy which examines the opportunities for developing or buying new products for new markets.

Business Level Strategic Planning

In business level, organizations try to improve their competitive position for their products or services in a specific market with their strategic plans. Thus, strategies at business level are also called competitive strategies. These strategies aim to create a profitable and enduring position against the forces making up competition in an industry.

Competition creates a situation in which two or more companies selling a product are rivals since they are pursuing the same customers. In pure competition , the products are homogenous, and there are so many buyers and sellers in the market so no firm becomes large enough to affect prices. Monopoly means one company dominates the market and controls market prices. Monopolistic competition means there are many sellers who are differentiating their products and services in a small way so that these products and services could be distinguished from those of competitors. Oligopoly creates a situation in which customers have some choices, but not as many as in monopolistic competition.

For analysing industry attractiveness, Porter proposes a five-forces model including the entry of new competitors (the threat of new entrants), the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors.

These five forces include all elements that might drive competition in an industry. The strength of these forces changes according to industry, and the collective strength of these forces sets the profitability of an industry as these forces affect prices and costs. However, the strength of these five forces may alter with the evolution of an industry.

Formulating Competitive Strategy

Understanding the forces shaping the competition in an industry is the starting point for developing strategy54 as well as for creating value. For creating value and differentiating this value in the eyes of buyers, all the activities of business must create value both individually and collectively, and this created value should be greater than the costs of all these activities55. Porter groups these activities performed during competing in an industry, and names it as “value chain”. Value chain is an “interdependent system or network of activities, connected by linkages”.

Value chain includes five primary activities (inbound logistics, operations, outbound logistics, marketing and sales, after-sale service) and four supporting activities (procurement, technology development, human resource management, firm infrastructure). These nine activities contain both cost elements and revenue.

By managing value chain as a system and reconfiguring it through relocating, regrouping, or eliminating activities, companies determine competitive strategies for increasing profit margins, which would be a firm’s relative position within its industry deciding if the profitability of a firm is above or below the industry average. To have an above average position leads to high rates of return, and sustainable competitive advantage is the fundamental basis for this above average position. Therefore, Porter offers the notion of generic strategies which are very appealing for scholars as it offers a solid theoretical framework. Porter develops three generic strategies: overall cost leadership, differentiation, and focus.

Overall cost leadership highlights efficiency. The objective here is to achieve lowest production and distribution costs to offer lower prices than competitors. For achieving this, company offers standard products which are suitable for majority of customers. As a result, the company could obtain higher market shares.

Differentiation aims to differentiate and/ or tailor company’s product or service or service offering to fulfil a unique customer need and to provide superior value to customers. With differentiation strategy, a company chooses one or more attributes, and differentiates these attributes in a different form than its competitors. This means an offering of the company should be unique or should be perceived as unique if the company expects to charge a premium price or higher prices than its competitors. By allowing companies to charge higher prices than competitors, this strategy helps companies capture higher market shares.

In focus strategy, rather than going after the whole market, company focuses on one or more narrow market segments, and alters its strategy to serve these and exclude others. The premise of focus strategy is to serve narrow market more effectively and/or efficiently than competitors. As a result, the firm achieves a competitive advantage in that narrow market either through differentiation by better satisfying the needs of customers in the narrow target, or through overall cost leadership by reducing costs in serving this target, or both.

Functional Level Strategic Planning

Functional strategies are organizational strategies that are designed to support business level strategies. These strategies are created by major functional departments such as production and operations: marketing, organization (e.g. human resources), and finance. The aim here is to aid achieving corporate and business unit objectives and strategies by providing maximization of resource productivity. To achieve this, functional strategies try to develop a distinctive competence thus in turn create a competitive advantage for the company as a whole or to the business unit.

Marketing functional strategy emphasizes mass marketing efforts with ‘push’ distribution strategies rather than ‘pull’ strategies focusing on advertisements to increase customer demand. From human resources perspective, employees in this function would try to hire and/or form a less costly workforce with limited skills and capabilities whereas finance would focus on creating competitive advantage through developing lower costs for funds or raising capital to support business level strategies.

Besides these major functions, companies may have other supporting functions such as logistics and supply chain management, procurement, and research and development (R&D). Accordingly, if a business unit has a low-cost strategy, logistics and supply chain management focuses on getting lowest fees for transporting goods whereas procurement would want to purchase the lowest cost inputs for supporting business level strategies.