PORTERS FIVE FORCES Porter, a guru of competitive strategy observes that organizations should be more concerned with the

intensity of competition within the industry in which it operates as it works on developing strategies. This level of intensity is determined by the following competitive forces:a) Threat of new entrants b) Rivalry among existing firms c) Threat of substitutes (products/Services) d) Bargaining power of buyers e) Bargaining power of suppliers

Threat of new entrants New entrants bring in new capacity and desire to gain market share and resources. Such firms will therefore be a threat to existing firms. The degree of threat will depend on entry barriers that make it difficult for the firms to enter the industry. The barriers to entry include: Economies of scale:- when firms expand their production capacity, they are able to enjoy cost advantages over the new rivals Product differentiation:- firms with high levels of differentiation engage in high levels of advertising and promotion High initial capital requirements:- where initial capital investment are high it creates a significant barrier to entry Access to distribution channels:- small firms may not have access to distribution channels which they need to sell their products Switching costs:- When firms have established programmes, switching to new ones may be difficult since it comes with costs Government policy: - through licensing requirements the government may limit entry into an industry. This will restrict access to raw materials and overall operations Cost disadvantages independent of sizes:-ones a new product earns sufficient market share it will enjoy cost advantages over new firms
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Rivalry among existing firms Firms in an industry are dependent on each other. Actions by one firm will have a noticeable effect on the competitors. efforts. Firms in the industry will either retaliate or come up with counter

Porter observes that intense rivalry is seen where the following factors exist:-

Where competitors are few and are equal in size, the competitors will watch each other carefully to be able to match moves of the competitors Rate of industry growth:- when this is slow firms will work towards taking sales from the competitors Product /service characteristics which are unique and different from what the

competitors offer will cause rivalry Fixed costs if high, firms may choose to offer cheaper rates enhancing rivalry Firms in an effort to operate at full capacity in order to ensure lower costs High exit barriers Diversity of rivals:- If rivals have different ideas they are likely to cross paths and challenge each others position

Threat of substitutes Substitutes are products that appear different but can satisfy the same needs as another product. The existence of substitutes limit the potential returns of an industry by placing a ceiling on the prices the firms in the industry can profitably charge

Bargaining Power of buyers Buyers may affect the industry through their ability to force down prices, bargain for higher quality or more services/products and play competitors against each other. A buyer is considered powerful under the following circumstances:Ila Page 2

Purchases a large proportion of the sellers product/service Able to integrate backwards by producing the product Alternative suppliers are many and the product is standard/ undifferentiated Changing suppliers costs are very little Purchased product represents a high percentage of the buyers costs thus providing an incentive to shop around for lower prices Buyer earns lower profits hence sensitive to costs and service differences Purchased product is unimportant to the final quality or price of product hence can be easily substituted

Bargaining power of suppliers The suppliers can affect the industry through their ability to raise prices or reduce quality of purchased goods and services. circumstances: Supplier industry is dominated by few companies Product supplied is unique and switching costs are high Substitutes are not readily available Suppliers can integrate forward and compete directly with their present customers Buyer only buys a small portion of the product hence unimportant to the supplier A supplier is considered powerful under the following

PORTERS GENERIC COMPETITIVE STRATEGY To outperform other firms, Michael Porter proposes lower cost and differentiation strategies. These strategies can be pursued by any type and size of business. For lower cost the firm can design, produce and market a product more efficiently than the competitors. However, in differentiation the firm is in a position to provide a unique and superior value to the buyer as seen in quality, special features, after sales services etc. The competitive advantage will depend on the competitive scope (the breadth of the companys target market)
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Porter suggests three broad or generic strategies for creating a defendable position in the longrun and outperforming competitors. 1) Cost Leadership: - This means having the lowest per-unit (i.e., average) cost in the industry that is, lowest cost relative to your rivals. It could also mean having the lowest per-unit cost among rivals in highly competitive industries, in which case returns or profits will be low but nonetheless higher than competitors. Cost leadership is defined independently of market structure. The Benefits of using cost leadership strategy are: It defends the firm against powerful buyers. Buyers can drive price down only to the level of the next most efficient producer. It defends against powerful suppliers. Cost leadership provides flexibility to absorb an increase in input costs, whereas competitors may not have this flexibility. The factors that lead to cost leadership also provide entry barriers in many instances. Economies of scale require potential rivals to enter the industry

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with substantial capacity to produce, and this means the cost of entry may be prohibitive to many potential competitors. Achieving a low cost position usually requires the following resources and skills: Large up-front capital investment in new technology, which hopefully leads to large market share in the long-run, but may lead to losses in the short-run. Continued capital investment to maintain cost advantage through economies of scale and market share Process innovation which requires developing cheaper ways of producing existing products. Intensive monitoring of labor, where workers frequently have an incentive-based pay structure (i.e., a contract which includes some combination of a fixed-wage plus piece-rate pay). Tight control of overhead. Cost Leadership: Maintaining cost leadership can be risky because: Innovations nullify past inventions and learning, and hence cost leadership requires continual capital investment to maintain cost advantage. Exclusive attention to cost can blind firms to changes in product requirements. Cost increases narrow price differentials and reduce ability to compete with competitors brand loyalty.

2) Differentiation This requires creating something that is perceived industry wide as being unique. Through differentiation one is able to create own market to some extent. It can be realized through different design, brand image, number of features or use of new technology. A differentiation strategy may mean differentiating along two or more of these dimensions. Differentiation is a defendable strategy for earning above average returns because:-

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It insulates a firm from competitive rivalry by creating brand loyalty; it lowers the price elasticity of demand by making customers less sensitive to price changes in your products.

Uniqueness, almost by definition, creates barriers and reduces substitutes. This leads to higher margins, which reduces the need for a low-cost advantage. Higher margins give the firm room to deal with powerful suppliers. Differentiation also mitigates buyer power since buyers now have fewer alternatives.

Achieving a successful strategy of differentiation usually requires the following: Exclusivity, which unfortunately also precludes market share and low cost advantage. Strong marketing skills Product innovation as opposed to process innovation. Applied Research & Development. Customer support Less emphasis on incentive based pay structure.

Differentiation Risks are: Cost differentiation between low cost firms and differentiating firms becomes too large to hold customer loyalty. Buyers trade-off features, service, or image for price. Buyers need for differentiation falls. Imitation decreases perceived differentiation

3) Focus or Niche Strategy:-Here we focus on a particular buyer group, product segment, or geographical market. Whereas low cost and differentiation are aimed at achieving their objectives industry wide, the focus or niche strategy is built on serving a particular target (customer, product, or location) very well. Focus strategy means achieving either a low cost advantage or differentiation in a narrow part of the market. For reasons discussed above, this creates a defendable position within that part of the market.
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STRATEGY FORMULATION VISION Statement that highlights broad intentions as driving point for achieving future aspirations of the organization but not specifying the means to be used to meet the desired goals and objectives. It defines what an organization wants to be in future The vision statement will help organization to achieve its goals faster as it describes the future aspirations of the organization. The development of vision should be participatory and

inspirational to the employees of the organization. A good vision statement should have the following characteristics: Be clear and unique Be creative but simple Be available Be progressive Be specific Articulate and reflect future achievement Create a high level of inspiration Highlight core values of the network

Rationale of a vision Organizations need vision statement for the following purposes:a) Provide direction and sense of purpose b) Nurture individuals to grow and become creative
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c) Plans ahead for sustainable development d) Adjust, adapt and win over the ever-changing environment e) Help lay policies and develop measures of excellence f) Reduce laziness and inconsistency within the network g) Assure individuals within the network and the society that the network is in the path of success h) Nurture commitment, involvement and sense of ownership among the individuals i) Inculcate culture of excellent performance j) Enhance synergy within the network and the social environment k) Ensure success in tumultuous environment

MISSION This is a statement that verbalizes the beliefs and the directions in which a visionary manager would want to lead the organization. It is the purpose or reason for the organization existence and it describes what the organization is providing to the society. When the mission is well conceived it will define the fundamental unique purpose that sets a company different from others. It defines the scope of the organizations operations in terms of the products and the market it serves. The mission will include the values and philosophy on how to carry out business and treat employees. It largely defines what a company is now

Features of a good mission A good mission should have the following:Ila Page 8

Obligations to stakeholders Scope of the business Sources of competitive advantage View of the future Members meaningfully involved in development Clarity of mission statement Based on organizations ideals and goals Workable if members are orientated on mission statement

Guidelines for mission statement Indicate roles and methods to use for fulfilling the vision Should actualize the vision Contains information on what needs to be fulfilled

Development of mission and vision The management dream about the organization in 10 to 20 years. They should dream with employees formally and informally. The dream is shared with the employees as their opinions are sought. The suggestions given would help build consensus. Once agreed it is adopted and popularized within the organization

Evaluating mission Does it describe an inspiring purpose without playing selfish interest of stakeholders

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Does it describe an organizations responsibility to stakeholders Does it describe business domain and its attractiveness Does it identify values that link with purpose? organization strategy Do values resonate and reinforce

Does it describe behaviour standards which enable people to evaluate their behaviour Does it give portrait of organization by capturing culture It is easy to read

OBJECTIVES These are the end results of planned activities stated in action verbs which show what is to be accomplished by when and quantified if possible. The objectives should be Specific,

Measurable, Achievable, Realistic and Time bound. While setting objectives those concerned should pay attention to the areas such as customer service e.g. reducing the customer complaints; financial areas such as capital structure, cash flow, dividend payments and working capital; human resource areas e.g. rates of absenteeism, turnover and grievance rates; market e.g. market share, willingness to buy; product sales and profitability; productivity; innovation; Corporate Social Responsibility; Resource efficiency. Good objectives should be : Measurable Consistent with the vision and the mission Challenging Reasonable, clear and verifiable Have specific time dimensions Accompanied by rewards and sanctions
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Compatible with the values of the management and employees

STRATEGY This is a master plan that starts how an organization will achieve mission and objectives (corporate, business and functional). Corporate objectives define the overall direction of the organization. Business strategy will focus on improving the competitive position of an

organization and its products. It can be competitive and cooperative. Organizations may adopt offensive or cooperative strategies. POLICIES These are defined as broad guidelines for decision making that link formulation of a strategy with its implementation. They ensure decisions made are in line with the vision, mission, objectives and strategies Strategy Formulation VISION:-Where organization intends to be MISSION:-Reason for existence OBJECTIVES:-the results to accomplish and by when

STRATEGIES: - Plan to achieve the vision, mission and objectives POLICIES:-Broad guidelines for decision- making

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STRATEGY IMPLEMENTATION This is the process by which strategies and functional policies are put into action through the development of action plans, goals, programmes, budgets, procedures, structures, cultures, motivation, communication, leadership, allocation of resources, working climate and enforcement. It ensures strategic plan is converted into action and then results. Its success is only seen when the organization attains its mission and vision. Strategy implementation is only possible through the following:a) Programs:-Statement of activities or steps needed to accomplish a plan. They help to make strategy action oriented b) Procedures (Standard Operating Procedures-SOPs):System of sequential steps or

techniques that describe in details how tasks or jobs are performed. They detail the various activities that must be carried out to complete an organizations programme c) Budgets: - Resource allocation plan that helps managers to coordinate operations and facilitate managerial control of performance. It shows the feasibility of the selected strategy Note: While implementing, the organization should ensure a synergy exists. According to Goold and Campbell this can be achieved through shared knowhow; coordinated strategies; shared tangible resources; economies of scale/scope; pooled negotiating power and new business creation Strategy This is a master plan that starts how an organization will achieve mission and objectives (corporate, business and functional). Corporate objectives define the overall direction of the organization. Business strategy will focus on improving the competitive position of an

organization and its products. It can be competitive and cooperative. Organizations may adopt offensive or cooperative strategies.

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Offensive strategies This is a market location tactic which is usually used in an established competitors market location. Some of the methods used to attack a competitors position are: Frontal assault: - the firm goes head to head with competitor. It matches the competitor in every category, from price to promotion to distribution channel. The attacker can only succeed if it has superior resources and its willing to persevere. It is considered an expensive tactic Flanking maneuver:- the firm attacks a part of the market where the competitor is weak thus avoiding attacking a competitors position of strength Bypass attack: A company does not attack competitor frontally or through the flank

but it seeks to change the rules of the game. The tactic attempts to cut the market out from under the established defender by offering a new type of product that makes the competitors product unnecessary e.g. Apple iPod sidestepping Microsoft Pocket PC Encirclement: - An attacking company encircles the competitors position in terms of products or market or both. The company that encircles has greater product variety and or serves more markets Guerilla warfare: - the firm hits and runs. The company is characterized by the use of small, intermittent assaults on different market segments held by the competitor. Small firms may use this to gain some market share without threatening a large established competitor. The firm engaging in this must be patient enough to accept small gains and to avoid pushing the established competitor to the edge or else it retaliates

Cooperative strategies

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This can also be used by a company to gain competitive advantage by working with other firms. Cooperative strategies include:a) Collusion:-This is an active cooperation of firms within an industry to reduce output and raise prices in order to get around the normal economic law of demand and supply. Collusion may be explicit (firms directly communicate and negotiate) or tacit (indirectly through an informal system of signals). b) Strategic alliances: - a partnership of two or more corporations to achieve strategically significant objectives that are mutually beneficial. The alliance may be beneficial in obtaining technology and or manufacturing capabilities, obtaining access to specific markets, reducing financial risks, reducing political risk and learning new capabilities

Types of Strategic Alliances Mutual service consortia:-This is a partnership of similar companies in similar industries that pool their resources to gain a benefit that is too expensive to develop alone e.g. technology. This arrangement is normally weak and distant. Joint venture: - A cooperative business activity between two or more separate organizations for strategic purposes to create an independent business entity and allocate ownership, operational responsibilities, and financial risks and rewards to each member while preserving their separate identity. It is useful when pursuing an opportunity that needs a capability from two companies. Licensing arrangement:- It is an agreement in which the licensing firm grants rights to another country or market to produce and or sell a product. The licensee pays compensation to the licensing firm in return for technical expertise. It is useful where the trademark or brand name is well known though the firm lacks sufficient funds to finance entry

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Value chain partnership: - This is a strong and close alliance in which a company forms a long-term arrangement with a key supplier or distributor for mutual advantage. This arrangement is strong and close.

Note: Strategic alliances normally involve uncertainty. It will only succeed when the following are put in place: Have a strategic purpose and integrate the alliance with each others strategy to ensure creation of mutual value The partner should have compatible goals and complementary capabilities Identify the risks and deal with them upfront Allocate responsibilities so that each partner specializes on what it does best Create incentives for cooperation Clarify objectives and avoid direct competition as this checks conflict Exchange human resources to maintain communication Operate with long-term horizons as this limits short term conflicts Agree on monitoring process where information is shared for mutual trust Ensure flexibility by showing willingness to renegotiate the relationship to keep up with the changing environment Define the exit strategy when objectives are achieved or the alliance fails

International Entry Strategies

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In a globalised world, growth has international implications. If an organization wants to enhance its profitability, it should work towards going international. Some of the popular options for international entry are:a) Exporting: - Requires shipping goods produced in the companys home country to other countries for marketing. This is advisable for companies that want to minimize risk. It has increased popularity for small companies b) Licensing: - Licensing company grants right to another firm in the host country to produce and or sell a product. It is useful when the trade mark or brand names well known but the company does not have sufficient funds to finance its entering the country directly. c) Franchising: - An agreement where the franchiser grants rights to another company to open a retail store uses the franchisers name and operating system. The franchisee pays the franchiser a percentage of its sales as a royalty. It provides the franchiser with an

opportunity to establish its presence in countries where the population or per capita spending is not sufficient for a major expansion effort d) Joint Venture: - A foreign corporation and a domestic company form a venture in order to combine resources and expertise needed to develop new products or technologies. It will enable a firm to enter a country that restricts foreign ownership. It is considered a quick method of obtaining local management while reducing risks and harassment by host country officials. e) Acquisition: - Involves purchase of another company already operating in that area. It works best if the firm acquires a firm with strong complementary product lines and a good distribution network f) Green Field development: - Used when a company does not want to purchase another companys problems along with its assets. The company builds its own manufacturing plant and distribution system. This is popular with firms possessing high levels of technology, multinational experience and diverse product lines
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g) Production sharing:- this is the process of combining the higher labour skills and technology available in developed countries with the lower cost labour available in developing countries. May be referred to outsourcing. h) Turnkey operations:Involves entering contracts for the construction of operating

facilities in exchange for a fee. The facilities are transferred to the host country or firm when they are complete i) BOT (Build, Operate, Transfer) concept: - variation of the turnkey operation where instead of turning facility over to the host country when completed, the company operates the facility for a fixed period of time during which it earns back its investment plus a profit. It later turns the facility to the government at little or no cost to the host country j) Management contracts: This offers a means through which a corporation can use

some of its personnel to assist a firm in a host country for a specified fee and period of time. It allows firm to continue earning some income from its investment and keep the operations going until local management is trained

EVALUATION AND CONTROL Evaluation and control in strategy management follows the following logical sequence:a) Determination of what to measure: - The top management and the operatives in consultation will specify processes and results to be monitored and evaluated. Significant elements in the process must be measured. The measures to use will vary from one organization to another. However they may include profitability, market share, cost reduction, traditional financial measures, stakeholder measures, shareholder value etc b) Establishment of standards of performance: The standards will give a detailed

expression of strategic objectives. The measures must include tolerance range which defines acceptable deviations. intermediate stages. Such standards must include final outputs and

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c) Measurement of actual performance:- the actual time when measurement should be done must be clarified. Once established the management in collaboration with the other members of staff should proceed to measure the performance. d) Comparison of actual performance with the standards:- those concerned should establish if the performance is within the tolerance range or deviations exist. e) Take corrective measures:- Where deviations are noted, the cause should be established and corrective measures undertaken

TYPES OF CONTROL Behaviour control: - this specifies the things to be done through policies, rules, standard procedures and orders. They can be used when performance standards are difficult Output control: - it specifies what to be accomplished by focusing on end results of the behaviour. It uses objectives and performance targets. Examples are sales quotas, profit objectives, customer satisfaction, cost reduction etc Input controls:-This focuses on the resources such as years of experience, levels of education etc Control guidelines Minimum amount of information is needed to ensure a reliable picture of the environment Monitor meaningful activities and results to help measure differences Done in a timely way to allow for corrective actions later Should use both the long term and short term measures Aimed at pinpoint exceptions

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Should lay emphasis of revision of meeting or exceeding standard rather than punishment for failing to meet standards

Control systems During control, the following systems may be applied: Budget (Implementation control):- Controls financial indicators of performance Responsibility centres: This is a control system used to monitor specific functions,

projects, divisions etc. They help to isolate a unit in order to help evaluate it separately from the rest of the organization. The responsibility centres have their own budgets and they include:a) Standard cost centres: - these are used in manufacturing facilities where standard costs are computed for each operation based on history. The standard cost is multiplied by the units produced to establish the expenses. It will help measure the cost of products and actual cost of production b) Revenue centres:- production is measured without consideration of resource costs. Centre is judged in terms of effectiveness rather than efficiency. Profits are not considered because sales departments have limited influence over them c) Expense centres:- Resources are measured without consideration for service or product costs. The typical expense centres are administrative, service and

research departments. Though they cost a company money they only contribute indirectly to revenues d) Profit centres:- Performance is measured in terms of the difference between revenue and expenditures. A profit centre is established whenever an

organizational unit has control over both its resources and its products or services. A company is organized into divisions of separate product lines. It allows the

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management of every division some autonomy to the extent that he or she is capable of keeping profits at a satisfactory level. e) Investment centres:- performance is measured in terms of the difference between its resources and its services or products. It ensures the asset base is also factored into their performance evaluation Premise control:- Helps check whether the premises on which the present strategies are based are still valid Special alert control:- Ensure rapid and thorough reconsiderations of the strategies due to sudden unexpected events Strategy surveillance control: - designed to monitor a broad range of events inside and outside the organization that are likely to affect the courses of the strategies. They are meant to uncover unanticipated information sources Auditing control:- Helps to objectively obtain and evaluate evidence about economic actions to establish degree of congruence with established standards Management audit:- Covers key aspects of the strategic management process in order to put them within a decision making framework

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