2 b Strategies, policies, and planning premises

Strategies
The term 'Strategy' has been adapted from war and is being increasingly used in business to reflect broad overall objectives and policies of an enterprise Edmund P Learned has defined strategies as "the pattern of objectives, purposes or goals and major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be and the kind of company it is or is to be".

According to Koontz and O' Donnell , "Strategies must often denote a general programme of action and deployment of emphasis and resources to attain comprehensive objectives". Strategy is the determination of the mission (or the fundamental purpose) and the basic long-term objectives of an enterprise, and the adoption of courses of action and allocation of resources necessary to achieve these aims Policies are general statements or understandings that guide managers' thinking in decision making The Strategic Planning Process

1. Inputs to the organization 2. Industry Analysis 3. Enterprise Profile

4. Orientation, Values, and Vision 5. Mission (Purpose), Major Objectives, and Strategic Intent 6. Present and Future External Environment 7. Internal Environment 8. Development of Alternative Strategies 9. Evaluation and Choice of Strategies 10. Medium- and Short-Range Planning 11. Implementation through Reengineering, Staffing, Leadership, and Control 12. Consistency Testing and Contingency Planning

Characteristics of Strategy (1) It is the right combination of different factors. (2) It relates the business organisation to the environment. (3) It is an action to meet a particular challenge, to solve particular problems or to attain desired objectives. (4) Strategy is a means to an end and not an end in itself. (5) It is formulated at the top management level. (6) It involves assumption of certain calculated risks. Business Strategy Seymour Tiles offers six criteria for evaluating an appropriate strategy. 1. Internal consistency: The strategy of an organisation must be consistent with its other strategies, goals, policies and plans. 2. Consistency with the environment: The strategy must be consistent with the external environment. The strategy selected should enhance the confidence and capability of the enterprise to manage and adapt with or give command over the environmental forces. 3. Realistic Assessment: Strategy needs a realistic assessment of the resources of the enterprisemen, money and materialsboth existing resources as also the resources, the enterprise can command. 4. Acceptable degree of risk: Any major strategy carries with it certain elements of risk and uncertainty. The amount of risk inherent in a strategy should be within the bearable

capacity of the enterprise. 5. Appropriate time: Time is the essence of any strategy. A good strategy not only provides the objectives to be achieved but also indicates when those objectives could be achieved. 6. Workability: Strategy must be feasible and should produce the desired results. Strategy Formulation There are three phases in strategy formation 1. 2. 3. Determination of objectives. Ascertaining the specific areas of strengths and weakness in the total environment. Preparing the action plan to achieve the objectives in the light of environmental forces.

Strategic Plans Are organization-wide, establish overall objectives, and position an organization in terms of its environment. Tactical Plans Specify the details of how an organizations overall objectives are to be achieved. Short-term Plans Cover less than one year. Long-term Plans Extend beyond five years. Strategic Plans Apply broadly to the entire organization. Establish the organizations overall objectives. Seek to position the organization in terms of its environment. Provide direction to drive an organizations efforts to achieve its goals. Serve as the basis for the tactical plans. Cover extended periods of time. Are less specific in their details. Tactical Plans (Operational Plans) Apply to specific parts of the organization. Are derived from strategic objectives. Specify the details of how the overall objectives are to be achieved. Cover shorter periods of time. Must be updated continuously to meet current challenges. Specific and Directional Plans Specific Plans Clearly defined objectives and leave no room for misinterpretation. What, when, where, how much, and by whom (process-focus) Directional Plans Are flexible plans that set out general guidelines. Go from here to there (outcome-focus) Single-Use Plan

Is used to meet the needs of a particular or unique situation. Single-day sales advertisement Standing Plan Is ongoing and provides guidance for repeatedly performed actions in an organization. Customer satisfaction policy

Strategic Management
Art & science of formulating, implementing, and evaluating, cross-functional decisions that enable an organization to achieve its objectives To exploit and create new and different opportunities for tomorrow In essence, the strategic plan is a companys game plan Elements Of Strategic Management,as minimum, includes 1. strategic planning 2. strategic control Terms In Strategic Management Purpose : purpose outlines why the organization exists; it includes a description of its current and future business (Leslie W. Rue) Mission : The mission of an organization is the unique reason for its existence that sets it apart from all others (A. James, F. Stoner). The organization's mission describes why the organization exists and guides what it should be doing. Goals : A goal is a desired future state that the organization attempts to realize (Amitai Etzioni). Objectives : Objectives refer to the specific kinds of results the organizations seek to achieve through its existence and operations (William F. Glueck) Strategy : The role of strategy is to identify the general approaches that the organization utilize to achieve its organizational objectives. Tactics : are specifics actions the organization might undertake in carrying its strategy Policy : "Policies are guide to action. They include how resources are to be allocated and how tasks assigned to the organization might be accomplished ... (William F. Glueck, and Lawrence R. Jauch " .Policies include guidelines, procedures, rules, programs, and budgets established to support efforts to achieve stated objectives

Strategists Strategists are the individuals who are involved in the strategic management process. the people responsible for major strategic decisions are the board of director, president, the chief executive officer, the chief operating officer, and the division managers.

3 Stages of the Strategic Management Process Strategy formulation Strategy implementation Strategy evaluation

Issues in Strategy Formulation Businesses to enter Businesses to abandon Allocation of resources Expansion or diversification International markets Mergers or joint ventures Avoidance of hostile takeover

Developing a strategy-supportive culture Creating an effective organizational structure Redirecting marketing efforts Preparing budgets Developing and utilizing information systems Linking employee compensation to organizational performance Action Stage of Strategic Management Mobilization of employees & managers Most difficult stage Interpersonal skills critical

HIERARCHY OF COMPANY STRATEGIES The corporate-level strategy. Executives craft the overall strategy for a diversified company Business strategies are developed usually by the general manager of a business unit Functional strategies. The aim is to support the business and corporate strategies.

Implementation is the process that turns strategies and plans into actions in order to accomplish strategic objectives and goals. Implementing your strategic plan is as important, or even more important, than your strategy According to a Fortune cover story in 1999, nine out of ten organizations fail to implement their strategic plan for many reasons: 60% of organizations dont link strategy to budgeting 75% of organizations dont link employee incentives to strategy 86% of business owners and managers spend less than one hour per month discussing strategy 95% of a typical workforce doesnt understand their organizations strategy

THE HARD Ss Strategy: the direction and scope of the company over the long term. Structure: the basic organization of the company, its departments, reporting lines, areas of expertise and responsibility (and how they inter-relate). Systems: formal and informal procedures that govern everyday activity, covering everything from management information systems, through to the systems at the point of contact with the customer (retail systems, call center systems, online systems, etc). THE SOFT Ss Skills: the capabilities and competencies that exist within the company. What it does best. Shared values: the values and beliefs of the company. Ultimately they guide employees towards 'valued' behavior. Staff: the company's people resources and how the are developed, trained and motivated. Style: the leadership approach of top management and the company's overall operating approach.

Eight Actions of Implementing Strategy 1. Build an Organization 2. Marshal resources 3. Institute policies 4. Pursue best practices and continuous improvement 5. Information and operating systems 6. Tying rewards to strategy and goals 7. Shape corporate culture 8. Exert leadership Building a Capable organization Staffing Build core competencies Develop an appropriate organizational structure

Staffing Find the right people Background, experience, values, personality and management style

Build core competencies Find out what competencies ae needed Develop the ability to do something Hone skills with experience

Build appropriate structure Structure must support strategy What value chain activities should be performed inside the company and which outside Structure internal organization around core value chain activities.- what we do well How much centralization and decentralization Dont build walls Link to suppliers and strategic allies

Marshal Resources Move resources to areas where the strategy requires Insure ther are enough resources to fund new initiatives Reduce resources where not needed

Internal analysis
To identify Strengths to build on Weaknesses to overcome

To find where it stands in terms of Resources, strengths and weaknesses To exploit Opportunities that are inline with its capabilities To assess capability gaps

Resources Tangible & intangible X capabilities = competencies ----- Resources Assets & Skills Assets Tangible & intangible Tangible Financial, organizational and physical Intangible Human resource, organizational, innovative, reputational, informational, technological competitive advantage

Capability and Competency Capability = ability to bundle resources to perform an activity C = (TA+IA+S) Competency = ability of an organization to achieve its purpose Core Competency = certain activities that can be performed exceptionally well compared to competitors Core competencies A well-performed internal activity that is central, not peripheral, to a companys strategy, competitiveness, and profitability Major value-creating skills and capabilities that are shared across multiple product lines or multiple businesses Results from the collaboration among different parts of an organization

Gives a company a potentially valuable competitive capability

Tools for I A
SWOT analysis Value chain analysis Financial analysis Key factor rating Functional area profile Strategic advantage profile

The TOWS Matrix is a conceptual framework for a systematic analysis that facilitates matching the external threats and opportunities with the internal weaknesses and strengths of the organization

4 Alternative Strategies SO strategy: WO strategy: ST strategy: WT strategy: Maxi Maxi Mini Maxi Maxi Mini Mini - Mini

Identifying External Threats to Profitability and Competitiveness

Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors Onerous regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval in a country

THE VALUE CHAIN A TOOL DEVELOPED BY DR. MICHAEL PORTER OF HARVARD BUSINESS SCHOOL CAN BE USED TO EXAMINE THE VARIOUS ACTIVITIES OF THE FIRM AND HOW THEY INTERACT IN ORDER TO PROVIDE A SOURCE OF COMPETITIVE ADVANTAGE BY: - PERFORMING THESE ACTIVITIES BETTER OR

- AT A LOWER COST THAN THE COMPET ITORS

TYPES OF FIRM ACTIVITIES 1. PRIMARY : - THOSE THAT ARE INVOLVED IN THE CREATION, SALE AND TRANSFER OF PRODUCTS (INCLUDING AFTER-SALES SERVICE) - INBOUND LOGISTICS: CONCERNED WITH RECEIVING, STORING, DISTRIBUTING INPUTS (e.g. HANDLING OF RAW MATERIALS, WAREHOUSING, INVENTORY CONTROL) - OPERATIONS COMPRISE THE TRANSFORMATION OF THE INPUTS INTO THE FINAL PRODUCT FORM (E.G. PRODUCTION, ASSEMBLY, AND PACKAGING) - OUTBOUND LOGISTICS - INVOLVE THE COLLECTING, STORING, AND DISTRIBUTING THE PRODUCT TO THE BUYERS (e.g. PROCESSING OF ORDERS, WAREHOUSING OF FINISHED GOODS, AND DELIVERY)

- MARKETING AND SALES : - HOW BUYERS CAN BE CONVINCED TO PURCHASE THE PRODUCT (e.g. ADVERTISING, PROMOTION, DISTRIBUTION)

- SERVICE :

INVOLVES HOW TO MAINTAIN THE VALUE OF THE PRODUCT AFTER IT IS PURCHASED (e.g. INSTALLATION, REPAIR, MAINTENANCE, AND TRAINING)

2. SUPPORT - THOSE THAT MERELY SUPPORT THE PRIMARY ACTIVITIES PROCUREMENT: -CONCERNED WITH THE TASKS OF PURCHASING INPUTS SUCH AS RAW MATERIALS, EQUIPMENT, AND EVEN LABOR - TECHNOLOGY DEVELOPMENT o o THESE ACTIVITIES ARE INTENDED TO IMPROVE THE PRODUCT AND THE PROCESS, CAN OCCUR IN MANY PARTS OF THE FIRM

. HUMAN RESOURCE MANAGEMENT o INVOLVED IN RECRUITING, HIRING, TRAINING,DEVELOPMENT AND COMPENSATION

FIRM INFRASTRUCTURE: - THE ACTIVITIES WHICH ARE NOT SPECIFIC TO ANY ACTIVITY AREA SUCH AS GENERAL MANAGEMENT, PLANNING, FINANCE, AND ACCOUNTING ARE CATEGORIZED UNDER FIRM INFRASTRUCTURE. USES OF VALUE CHAIN ANALYSIS THE SOURCES OF THE COMPETITIVE ADVANTAGE OF A FIRM CAN BE SEEN FROM ITS DISCRETE ACTIVITIES AND HOW THEY INTERACT WITH ONE ANOTHER. THE VALUE CHAIN IS A TOOL FOR SYSTEMATICALLY EXAMINING THE ACTIVITIES OF A FIRM AND HOW THEY INTERACT WITH ONE ANOTHER AND AFFECT EACH OTHERS COST AND PERFORMANCE A FIRM GAINS A COMPETITIVE ADVANTAGE BY PERFORMING THESE ACTIVITIES BETTER OR AT LOWER COST THAN COMPETITORS. THE VALUE IS THE TOTAL AMOUNT (i.e. TOTAL REVENUE) THAT BUYERS ARE WILLING TO PAY FOR A FIRMS PRODUCTS THE DIFFERENCE BETWEEN THE TOTAL VALUE (OR REVENUE) AND THE TOTAL COST OF PERFORMING ALL OF THE FIRMS ACTIVITIES PROVIDES THE MARGIN EVERY ACTIVITY THAT IS DONE BY A FIRM NEEDS TO BE CAPTURED IN A PRIMARY OR SUPPORT ACTIVITY.

ANALYZING THE CHAIN COVER THE ENTIRE COST STRUCTURE OF THE COMPANY BE SURE TO INCLUDE THE SUB-CONTRACTED OR OUTSOURCED PORTIONS

LINKAGES WITHIN THE VALUE CHAIN NOT JUST A COMPILATION OF ACTIVITIES THAT ARE INDEPENDENT OF EACH OTHER; INSTEAD, IT IS A SYSTEM OF ACTIVITIES THAT ARE INTERDEPENDENT BECAUSE THEY ARE RELATED BY THEIR LINKAGES. THROUGH THE LINKAGES, THE PERFORMANCE OF ONE ACTIVITY AFFECTS THE COST OR PERFORMANCE OF ANOTHER. THESE LINKAGES BETWEEN THE ACTIVITIES SUGGEST THAT THE COST ADVANTAGE OR THE DIFFERENTIATION OF A FIRM WOULD DEPEND NOT JUST ON THE COST REDUCTION OR PERFORMANCE IMPROVEMENT OF AN INDIVIDUAL ACTIVITY. DO NOT JUST LOOK AT EACH ACTIVITY INDEPENDENTLY THE LINKAGES BETWEEN THE ACTIVITIES CAN BE IDENTIFIED BY SEARCHING FOR WAYS IN WHICH EACH VALUE ACTIVITY AFFECTS OR IS AFFECTED BY OTHERS. OPTIMIZATION AND COORDINATION BETWEEN THE VARIOUS ACTIVITIES OF THE FIRM CAN BE ACHIEVED BY EXPLOITING THESE LINKAGES. VERTICAL LINKAGES LINKAGES CAN ALSO EXIST OUTSIDE THE FIRM; FOR INSTANCE THERE IS A LINKAGE BETWEEN A FIRMS CHAIN AND THE VALUE CHAIN OF ITS SUPPLIERS AND CHANNELS. e.g. THE ACTIVITIES OF THE RAW MATERIALS SUPPLIERS AFFECT THE ACTIVITIES OF THE FIRM. SIMILARLY, THE ACTIVITIES OF THE DISTRIBUTOR ALSO AFFECT THE FIRM. THESE LINKAGES CAN PROVIDE OPPORTUNITIES FOR THE FIRM TO ENHANCE ITS COMPETITIVE ADVANTAGE. THE VALUE CHAIN OF A FIRM IS A PART OF THE VALUE SYSTEM, WHICH IS THE LARGER STREAM OF ACTIVITIES FROM SUPPLIERS TO BUYERS. BECAUSE OF THE INTERACTIONS BETWEEN THEM, THE SUPPLIERS AND EVEN THE CHANNELS AFFECT A COMPANYS VALUE CHAIN. THE PRODUCT OF A FIRM REPRESENTS A PURCHASED INPUT TO THE BUYERS CHAIN. DIFFERENTIATION CAN RESULT FROM HOW A FIRMS VALUE CHAIN RELATES TO THE VALUE CHAIN OF ITS BUYER

 VALUE IS CREATED WHEN A FIRM CREATES COMPETITIVE ADVANTAGE FOR ITS BUYER. A FIRM CAN ALSO ENTER INTO COALITIONS WITH INDEPENDENT FIRMS TO ACHIEVE BENEFITS FROM THE LINKAGES AMONG THEIR VARIOUS VALUE CHAINS. EXAMPLES OF SUCH COALITIONS ARE TECHNOLOGY LICENSES AND JOINT VENTURES. DEFINE THE BUSINESS UNIT IN WHICH THE VALUE CHAIN WOULD BE OPTIMAL FOR THE FIRM e.g. EXPORT SALES DIVISION vs. LOCAL SALES DIVISION SINCE THE APPLICATION OF THE VALUE CHAIN ANALYSIS TO AN INDUSTRY WILL LIKELY BLUR OR HIDE THESE SOURCES OF COMPETITIVE ADVANTAGE, DR. PORTER THEREFORE SUGGESTS THAT: THE BUSINESS UNIT IS THE CORRECT LEVEL TO CONSTRUCT A VALUE CHAIN AND THE APPLICATION TO AN ENTIRE SECTOR OR INDUSTRY IS NOT RECOMMENDED. NEVERTHELESS, VALUE CHAIN ANALYSIS ON AN INDUSTRY LEVEL HAS BEEN PERFORMED IN NUMEROUS INDUSTRY STUDIES ALL OVER THE WORLD. THE PEARL 2 PROJECT HAS, THEREFORE, DECIDED TO UTILIZE THE VALUE CHAIN ANALYSIS IN THE VARIOUS STATE-OF-THE SECTOR REPORTS

Monte Carlo Analysis

Introduction Having being named after the principality famous for its casinos, the term Monte Carlo Analysis conjures images of an intricate strategy aimed at maximizing one.s earnings in a casino game. However Monte Carlo Analysis refers to a technique in project management where a manager computes and calculates the total project cost and the project schedule many times. This is done using a set of input values that have been selected after careful deliberation of probability distributions or potential costs or potential durations. Importance of the Monte Carlo Analysis The Monte Carlo Analysis is important in project management as it allows a project manager to calculate a probable total cost of a project as well as to find a range or a potential date of completion for the project. Since a Monte Carlo Analysis uses quantified data, this allows project managers to better communicate with senior management, especially when the latter is pushing for impractical project completion dates or unrealistic project costs. Also, this type of an analysis allows the project managers to quantify perils and ambiguities in project schedules. A Simple Example of the Monte Carlo Analysis A project manager creates three estimates for the duration of the project: one being the most likely duration, one the worst case scenario and the other being the best case scenario. For each estimate, the project manager consigns the probability of occurrence. The project is one that involves three tasks. 1. The first task is likely to take three days (70% probability), but it can also be completed in two days or even four days. The probability of it taking two days to complete is 10% percent and the probability of it taking four days to finish is 20% percent. 2. The second task has a 60% percent probability of taking six days to finish, a 20% percent probability each of being completed in five days or eight days. 3. The final task has an 80% percent probability of being completed in four days, 5% percent probability of being completed in three days and a 15% percent probability of being completed in five days.

Using the Monte Carlo Analysis, a series of simulations are done on the project probabilities. The simulation is to run for a thousand odd times and for each simulation, an end date is noted. Once the Monte Carlo Analysis is completed, there would be no single project completion date. Instead the project manager has a probability curve depicting the likely dates of completion and the probability of attaining each. Using this probability curve, the project manager informs the senior management of the expected date of completion. The project manager would choose the date with a ninety percent chance of attaining it. Therefore it could be said that, using the Monte Carlo Analysis, the project has a ninety percent chance of being completed in x number of days. Similarly, a project manager can adjudge the estimated budget for a project using probabilities to simulate different end results and in turn use the findings in a probability curve. How is the Monte Carlo Analysis Carried Out? The above example was one that contained a mere three tasks. In reality, such projects contain hundreds if not thousands of tasks. Using the Monte Carlo Analysis, a project manager is able to derive a probability curve to show the ambiguity surrounding the duration and the costs surrounding these hundreds or thousands of tasks. Conducting simulations involving hundreds or thousands of tasks is a tedious job to be done manually. Today there is project management scheduling software that can conduct thousands of simulations and offer the project manager different end results in a probability curve. The Different Types of Probability Distributions/Curves A Monte Carlo Analysis shows the risk analysis involved in a project through a probability distribution that is a model of possible values. Some of the commonly used probability distributions or curves for Monte Carlo Analysis include:

The Normal or Bell Curve: In this type of probability curve, the values in the middle are the likeliest to occur. The Lognormal Curve: Here values are skewed. A Monte Carlo Analysis gives this type of probability distribution for project management in the real estate industry or oil industry.

The Uniform Curve: All instances have an equal chance of occurring. This type of probability distribution is common with manufacturing costs and future sales revenues for a new product. The Triangular Curve: The project manager enters the minimum, maximum or most likely values. The probability curve, a triangular one, will display values around the most likely option. Conclusion The Monte Carlo Analysis is an important method adopted by managers to calculate the many possible project completion dates and the most likely budget required for the project. Using the information gathered through the Monte Carlo Analysis, project managers are able to give senior management the statistical evidence for the time required to complete a project as well as propose a suitable budget.

Business Portfolio Matrix A company may have multiple business units (SBUs) that in turn have several product lines composed of multiple products with variants (items, SKUs). The portfolio matrix is most applicable at the corporate level (which SBUs?), and at the SBU level (which product lines?)and is often useful for sorting markets, e.g. regional geographic markets with different characteristics. The essence of the strategic portfolio matrix is that businesses, products, and markets can be categorized along variants of two fundamental dimensions: market attractiveness and relative business strength . For example, the pioneering BCG matrix categorizes businesses based on relative market share (a proxy for business strength) and market growth (a selective measure of market attractiveness). The popular GE / McKinsey matrix sorts by multi-factor consolidated measures of business strength and market attractiveness.

Ultimately, market attractiveness is a calibration of the size of the prospective profit pool available in the market. In effect, it is an analytical assessment of the industry's aggregate PLC profit peak. The portfolio framework can be reduced to a very simple resource allocation principle: companies should invest in products that have large prospective profit pools (the ultimate measure of market attractiveness), and for which the company has an existing or potential competitive advantage that enables it to capture a meaningful share of the profit pool. At the opposite end of the continuum are unattractive markets where a company has no particular competitive strength. These are small or declining markets that should be avoided. If the company has legacy products in this category, they should be harvested (i.e. cut costs and raise prices to maximize profit) or, if unprofitable, divested.

The most questionable products are in attractive markets where the company has a weak or unestablished competitive position. Action must be taken to strengthen (develop) the competitive position (moving the business to the invest / grow quadrant) or the company should cut its losses and withdraw. The fourth category is comprised of markets where the company is competitively strong but the market is unattractive. In these cases, "attractive" may be in the eyes of the beholder. The aggregate markets may be mature or declining, discouraging participation by most companies. But, the markets may still be profitable, especially for companies with strong established positions (i.e. high share, low costs). These companies should maintain their positions and protect the profits and cash flow generated by the businesses. Further, the initial sorting and categorization is a static representation. But, markets and competitive positions are dynamic. Markets are always changing (e.g. growing or declining, becoming more or less profitable), and competitive positions can be changed via strategic and tactical initiatives. Projecting these dynamics is fundamental to effective portfolio management.

The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities. The company must: (1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and (2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained. The two best-known portfolio planning methods are the Boston Consulting Group Portfolio Matrix and the McKinsey / General Electric Matrix (discussed in this revision note). In both methods, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised. The McKinsey / General Electric Matrix The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. Secondly, competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. The diagram below illustrates some of the possible elements that determine market attractiveness and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:

Factors that Affect Market Attractiveness Whilst any assessment of market attractiveness is necessarily subjective, there are several factors which can help determine attractiveness. These are listed below: - Market Size - Market growth - Market profitability - Pricing trends - Competitive intensity / rivalry - Overall risk of returns in the industry - Opportunity to differentiate products and services - Segmentation - Distribution structure (e.g. retail, direct, wholesale Factors that Affect Competitive Strength Factors to consider include: - Strength of assets and competencies - Relative brand strength - Market share - Customer loyalty - Relative cost position (cost structure compared with competitors) - Distribution strength - Record of technological or other innovation - Access to financial and other investment resources

Porter's Five Forces Model: analysing industry structure Author: Jim Riley Last updated: Wednesday 24 October, 2012 Overview of the Five Forces Model Porter identified five factors that act together to determine the nature of competition within an industry. These are the:

Threat of new entrants to a market Bargaining power of suppliers Bargaining power of customers (buyers) Threat of substitute products Degree of competitive rivalry

He identified that high or low industry profits (e.g. soft drinks v airlines) are associated with the following characteristics:

Lets look at each one of the five forces in a little more detail to explain how they work. Threat of new entrants to an industry

If new entrants move into an industry they will gain market share & rivalry will intensify The position of existing firms is stronger if there are barriers to entering the market If barriers to entry are low then the threat of new entrants will be high, and vice versa

Barriers to entry are, therefore, very important in determining the threat of new entrants. An industry can have one or more barriers. The following are common examples of successful barriers: Barrier Investment cost Notes High cost will deter entry High capital requirements might mean that only large businesses can compete

Economies of scale Lower unit costs make it difficult for smaller newcomers to available to existing firms break into the market and compete effectively Regulatory and legal restrictions Each restriction can act as a barrier to entry E.g. patents provide the patent holder with protection, at least in the short run Existing products with strong USPs and/or brand increase customer loyalty and make it difficult for newcomers to gain market share

Product differentiation (including branding)

Access to suppliers and distribution channels

A lack of access will make it difficult for newcomers to enter the market

Retaliation by established E.g. the threat of price war will act to discourage new entrants products But note that competition law outlaws actions like predatory pricing What makes an industry easy or difficult to enter? The following table helps summarise the issues you should consider: Easy to Enter Common technology Access to distribution channels Low capital requirements No need to have high capacity and output Absence of strong brands and customer loyalty Bargaining power of suppliers If a firms suppliers have bargaining power they will:

Difficult to Enter Patented or proprietary know-how Well-established brands Restricted distribution channels High capital requirements Need to achieve economies of scale for acceptable unit costs

Exercise that power Sell their products at a higher price Squeeze industry profits

If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more powerful the customer (buyer), the lower the price that can be achieved by buying from them. Suppliers find themselves in a powerful position when:

There are only a few large suppliers The resource they supply is scarce The cost of switching to an alternative supplier is high The product is easy to distinguish and loyal customers are reluctant to switch The supplier can threaten to integrate vertically The customer is small and unimportant There are no or few substitute resources available

Just how much power the supplier has is determined by factors such as:

Factor Uniqueness of the input supplied

Note If the resource is essential to the buying firm and no close substitutes are available, suppliers are in a powerful position A few large suppliers can exert more power over market prices that many smaller suppliers each with a small market share If there is great competition, the supplier will be in a stronger position A business may be locked in to using inputs from particular suppliers e.g. if certain components or raw materials are designed into their production processes. To change the supplier may mean changing a significant part of production

Number and size of firms supplying the resources

Competition for the input from other industries Cost of switching to alternative sources

Bargaining power of customers Powerful customers are able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry. A great example in the UK currently is the dominant grocery supermarkets which are able exert great power over supply firms. You can see a great video about this issue here. Several factors determine the bargaining power of customers, including: Factor Number of customers Note The smaller the number of customers, the greater their power The larger the volume, the greater the bargaining power of customers The smaller the number of alternative suppliers, the less opportunity customers have for shopping around If customers pose a threat of integrating backwards they will enjoy increased power Customers that are tied into using a suppliers products

Their size of their orders

Number of firms supplying the product The threat of integrating backwards The cost of switching

(e.g. key components) are less likely to switch because there would be costs involved Customers tend to enjoy strong bargaining power when:

There are only a few of them The customer purchases a significant proportion of output of an industry They possess a credible backward integration threat that is they threaten to buy the producing firm or its rivals They can choose from a wide range of supply firms They find it easy and inexpensive to switch to alternative suppliers

Threat of substitute products A substitute product can be regarded as something that meets the same need Substitute products are produced in a different industry but crucially satisfy the same customer need. If there are many credible substitutes to a firms product, they will limit the price that can be charged and will reduce industry profits. As an example, consider the many substitutes that consumers now have to buying a newspaper for their news The extent of the threat depends upon

The extent to which the price and performance of the substitute can match the industrys product The willingness of customers to switch Customer loyalty and switching costs

If there is a threat from a rival product the firm will have to improve the performance of their products by reducing costs and therefore prices and by differentiation. Degree of competitive rivalry If there is intense rivalry in an industry, it will encourage businesses to engage in

Price wars (competitive price reductions), Investment in innovation & new products Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits. Several factors determine the degree of competitive rivalry; the main ones are:

Factor Number of competitors in the market Market size and growth prospects Product differentiation and brand loyalty

Note Competitive rivalry will be higher in an industry with many current and potential competitors Competition is always most intense in stagnating markets The greater the customer loyalty the less intense the competition The lower the degree of product differentiation the greater the intensity of price competition If buyers are strong and/or if close substitutes are available, there will be more intense competitive rivalry The existence of spare capacity will increase the intensity of competition Where fixed costs are a high percentage of costs then profits will be very dependent on volume As a result there will be intense competition over market shares If it is difficult or expensive to exit an industry, firms will remain thus adding to the intensity of competition

The power of buyers and the availability of substitutes

Capacity utilisation

The cost structure of the industry

Exit barriers

PEST Analysis Author: Jim Riley Last updated: Wednesday 24 October, 2012 PEST analysis is concerned with the key external environmental influences on a business. The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business. Identifying PEST influences is a useful way of summarising the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences. The table below lists some possible factors that could indicate important environmental influences for a business under the PEST headings: Political / Legal Environmental regulation and protection Taxation (corporate; consumer) Economic Economic growth (overall; by industry sector) Social Income distribution (change in distribution of disposable income; Technological Government spending on research

Monetary policy (interest Demographics (age structure of the rates) population; gender; family size and composition; changing nature of occupations) Government spending (overall level; specific spending priorities)

Government and industry focus on technological effort

International trade regulation

Labour / social mobility New discoveries and development

Consumer protection Policy towards unemployment (minimum wage, unemployment benefits, grants) Employment law Taxation (impact on consumer disposable income, incentives to invest in capital equipment, corporation tax rates)

Lifestyle changes (e.g. Home working, single households)

Speed of technology transfer

Attitudes to work and leisure

Rates of technological obsolescence

Government organisation / attitude

Exchange rates (effects Education on demand by overseas customers; effect on cost of imported components) Inflation (effect on costs and selling prices) Stage of the business cycle (effect on shortterm business performance) Economic "mood" consumer confidence Fashions and fads

Energy use and costs

Competition regulation

Changes in material sciences Impact of changes in Information technology

Health & welfare

Living conditions (housing, amenities, pollution)

Internet!

Core Competencies Author: Jim Riley Last updated: Wednesday 24 October, 2012 Introduction Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage. Core Competencies are not seen as being fixed. Core Competencies should change in response to changes in the company's environment. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change. Identifying Core Competencies Prahalad and Hamel suggest three factors to help identify core competencies in any business: What does the Core Competence Achieve? Provides potential access to a wide variety of markets Comments / Examples

The key core competencies here are those that enable the creation of new products and services. Example: Why has Saga established such a strong leadership in supplying financial services (e.g. insurance) and holidays to the older generation? Core Competencies that enable Saga to enter apparently different markets: - Clear distinctive brand proposition that focuses solely on a closely-defined customer group - Leading direct marketing skills - database management; direct-mailing campaigns; call centre sales conversion - Skills in customer relationship management

Makes a significant contribution to the perceived customer benefits of the end product

Core competencies are the skills that enable a business to deliver a fundamental customer benefit - in other words: what is it that causes customers to choose one product over another? To identify core competencies in a particular market, ask questions such as "why is the customer willing to pay more or less for one product or service than another?" "What is a customer actually paying for?

Example: Why have Tesco been so successful in capturing leadership of the market for online grocery shopping? Core competencies that mean customers value the Tesco.com experience so highly: - Designing and implementing supply systems that effectively link existing shops with the Tesco.com web site - Ability to design and deliver a "customer interface" that personalises online shopping and makes it more efficient - Reliable and efficient delivery infrastructure (product picking, distribution, customer satisfaction handling) Difficult for competitors to imitate A core competence should be "competitively unique": In many industries, most skills can be considered a prerequisite for participation and do not provide any significant competitor differentiation. To qualify as "core", a competence should be something that other competitors wish they had within their own business. Example:Why does Dell have such a strong position in the personal computer market? Core competencies that are difficult for the competition to imitate: - Online customer "bespoking" of each computer built - Minimisation of working capital in the production process - High manufacturing and distribution quality - reliable products at competitive prices A competence which is central to the business's operations but which is not exceptional in some way should not be considered as a core competence, as it will not differentiate the business from any other similar businesses. For example, a process which uses common computer components and is staffed by people with only basic training cannot be regarded as a core competence. Such a process is highly unlikely to generate a differentiated advantage over rival businesses. However it is possible to develop such a process into a core competence with suitable investment in equipment and training. It follows from the concept of Core Competencies that resources that are standardised or easily available will not enable a business to achieve a competitive advantage over rivals.

Competitor Analysis Author: Jim Riley Last updated: Wednesday 24 October, 2012 Introduction Competitor Analysis is an important part of the strategic planning process. This revision note outlines the main role of, and steps in, competitor analysis Why bother to analyse competitors? Some businesses think it is best to get on with their own plans and ignore the competition. Others become obsessed with tracking the actions of competitors (often using underhand or illegal methods). Many businesses are happy simply to track the competition, copying their moves and reacting to changes. Competitor analysis has several important roles in strategic planning: To help management understand their competitive advantages/disadvantages relative to competitors To generate understanding of competitors past, present (and most importantly) future strategies To provide an informed basis to develop strategies to achieve competitive advantage in the future To help forecast the returns that may be made from future investments (e.g. how will competitors respond to a new product or pricing strategy? Questions to ask What questions should be asked when undertaking competitor analysis? The following is a useful list to bear in mind: Who are our competitors? (see the section on identifying competitors further below) What threats do they pose? What is the profile of our competitors? What are the objectives of our competitors? What strategies are our competitors pursuing and how successful are these strategies? What are the strengths and weaknesses of our competitors? How are our competitors likely to respond to any changes to the way we do business? Sources of information for competitor analysis Davidson (1997) described how the sources of competitor information can be neatly grouped into three categories:

 Recorded data: this is easily available in published form either internally or externally. Good examples include competitor annual reports and product brochures; Observable data: this has to be actively sought and often assembled from several sources. A good example is competitor pricing; Opportunistic data: to get hold of this kind of data requires a lot of planning and organisation. Much of it is anecdotal, coming from discussions with suppliers, customers and, perhaps, previous management of competitors. The table below lists possible sources of competitor data using Davidsons categorisation: Recorded Data Annual report & accounts Press releases Newspaper articles Analysts reports Regulatory reports Government reports Presentations / speeches Observable Data Pricing / price lists Advertising campaigns Promotions Tenders Patent applications Opportunistic Data Meetings with suppliers Trade shows Sales force meetings Seminars / conferences Recruiting ex-employees Discussion with shared distributors Social contacts with competitors

McKinsey Growth Pyramid - Growth Strategy Author: Jim Riley Last updated: Wednesday 24 October, 2012 Introduction This model is similar in some respects to the well-established Ansoff Model. However, it looks at growth strategy from a slightly different perspective. The McKinsey model argues that businesses should develop their growth strategies based on: Operational skills Privileged assets Growth skills Special relationships Growth can be achieved by looking at business opportunities along several dimensions, summarised in the diagram below:

Operational skills are the core competences that a business has which can provide the foundation for a growth strategy. For example, the business may have strong competencies in customer service; distribution, technology. Privileged assets are those assets held by the business that are hard to replicate by competitors. For example, in a direct marketing-based business these assets might include a particularly large customer database, or a well-established brand.

 Growth skills are the skills that businesses need if they are to successfully manage a growth strategy. These include the skills of new product development, or negotiating and integrating acquisitions. Special relationships are those that can open up new options. For example, the business may have specially string relationships with trade bodies in the industry that can make the process of growing in export markets easier than for the competition. The model outlines seven ways of achieving growth, which are summarised below: Existing products to existing customers The lowest-risk option; try to increase sales to the existing customer base; this is about increasing the frequency of purchase and maintaining customer loyalty Existing products to new customers Taking the existing customer base, the objective is to find entirely new products that these customers might buy, or start to provide products that existing customers currently buy from competitors New products and services A combination of Ansoffs market development & diversification strategy taking a risk by developing and marketing new products. Some of these can be sold to existing customers who may trust the business (and its brands) to deliver; entirely new customers may need more persuasion New delivery approaches This option focuses on the use of distribution channels as a possible source of growth. Are there ways in which existing products and services can be sold via new or emerging channels which might boost sales? New geographies With this method, businesses are encouraged to consider new geographic areas into which to sell their products. Geographical expansion is one of the most powerful options for growth but also one of the most difficult. New industry structure This option considers the possibility of acquiring troubled competitors or consolidating the industry through a general acquisition programme New competitive arenas This option requires a business to think about opportunities to integrate vertically or consider whether the skills of the business could be used in other industries.

Strategic Audit Author: Jim Riley Last updated: Wednesday 24 October, 2012 In our introduction to business strategy, we emphasised the role of the "business environment" in shaping strategic thinking and decision-making. The external environment in which a business operates can create opportunities which a business can exploit, as well as threats which could damage a business. However, to be in a position to exploit opportunities or respond to threats, a business needs to have the right resources and capabilities in place. An important part of business strategy is concerned with ensuring that these resources and competencies are understood and evaluated - a process that is often known as a "Strategic Audit". The process of conducting a strategic audit can be summarised into the following stages: (1) Resource Audit: The resource audit identifies the resources available to a business. Some of these can be owned (e.g. plant and machinery, trademarks, retail outlets) whereas other resources can be obtained through partnerships, joint ventures or simply supplier arrangements with other businesses. You can read more about resources here. (2) Value Chain Analysis: Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings: (1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("outsourced"). You can read more about Value Chain Analysis here. (3) Core Competence Analysis: Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power.

Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage. You can read more about the concept of Core Competencies here. (4) Performance Analysis The resource audit, value chain analysis and core competence analysis help to define the strategic capabilities of a business. After completing such analysis, questions that can be asked that evaluate the overall performance of the business. These questions include: - How have the resources deployed in the business changed over time; this is "historical analysis" - How do the resources and capabilities of the business compare with others in the industry "industry norm analysis" - How do the resources and capabilities of the business compare with "best-in-class" - wherever that is to be found- "benchmarking" - How has the financial performance of the business changed over time and how does it compare with key competitors and the industry as a whole? - "ratio analysis" (5) Portfolio Analysis: Portfolio Analysis analyses the overall balance of the strategic business units of a business. Most large businesses have operations in more than one market segment, and often in different geographical markets. Larger, diversified groups often have several divisions (each containing many business units) operating in quite distinct industries. An important objective of a strategic audit is to ensure that the business portfolio is strong and that business units requiring investment and management attention are highlighted. This is important - a business should always consider which markets are most attractive and which business units have the potential to achieve advantage in the most attractive markets. Traditionally, two analytical models have been widely used to undertake portfolio analysis: - The Boston Consulting Group Portfolio Matrix (the "Boston Box"); - The McKinsey/General Electric Growth Share Matrix (6) SWOT Analysis: SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. Read more about it here.

Premising and Forecasting

Planning premises are the anticipated environments in which plans are expected to operate Environmental Forecasting Values and areas of forecasting Forecasting with the Delphi technique What are the typical steps of the technique?

Types of Planning Premises

Different types of planning premises are depicted in the picture (figure) below.

Types of Planning Premises are briefly explained as follows:-

1. Internal and External Premises

1. Internal Premises come from the business itself. It includes skills of the workers, capital investment policies, philosophy of management, sales forecasts, etc. 2. External Premises come from the external environment. That is, economic, social, political, cultural and technological environment. External premises cannot be controlled by the business.

2. Controllable, Semi-controllable and Uncontrollable Premises

1. Controllable Premises are those which are fully controlled by the management. They include factors like materials, machines and money. 2. Semi-controllable Premises are partly controllable. They include marketing strategy. 3. Uncontrollable Premises are those over which the management has absolutely no control. They include weather conditions, consumers' behaviour, government policy, natural calamities, wars, etc.

3. Tangible and Intangible Premises

1. Tangible Premises can be measured in quantitative terms. They include units of production and sale, money, time, hours of work, etc. 2. Intangible Premises cannot be measured in quantitative terms. They include goodwill of the business, employee's morale, employee's attitude and public relations.

4. Constant and Variable Premises

1. Constant Premises do not change. They remain the same, even if there is a change in the course of action. They include men, money and machines. 2. Variable Premises are subject to change. They change according to the course of action. They include union-management relations

Management by Exception
Management by exception is the practice of examining the financial and operational results of a business, and only bringing issues to the attention of management if results represent substantial differences from the budgeted or expected amount. For example, the company controller may be required to notify management of those expenses that are the greater of $10,000 or 20% higher than expected. The purpose of the management by exception concept is to only bother management with the most important variances from the planned direction or results of the business. Managers will presumably spend more time attending to and correcting these larger variances. The concept can be fine-tuned, so that smaller variances are brought to the attention of lower-level managers, while a massive variance is reported straight to senior management. Advantages of Management by Exception There are several valid reasons for using this technique. They are:

It reduces the amount of financial and operational results that management must review, which is a more efficient use of their time. The report writer linked to the accounting system can be set to automatically print reports at stated intervals that contain the predetermined exception levels, which is a minimallyinvasive reporting approach. This method allows employees to follow their own approaches to achieving the results mandated in the company's budget. Management will only step in if exception conditions exist.

Disadvantages of Management by Exception There are several issues with the management by exception concept, which are:

This concept is based on the existence of a budget against which actual results are compared. If the budget was not well formulated, there may be a large number of variances, many of which are irrelevant, and which will waste the time of anyone investigating them. The concept requires the use of financial analysts who prepare variance summaries and present this information to management. Thus, an extra layer of corporate overhead is required to make the concept function properly. This concept is based on the command-and-control system, where conditions are monitored and decisions made by a central group of senior managers. You could instead have a decentralized organizational structure, where local managers could monitor conditions on a daily basis, and so would not need an exception reporting system.

The concept assumes that only managers can correct variances. If a business were instead structured so that front line employees could deal with most variances as soon as they arise, there would be little need for management by exception.

Business Models (Out Sourcing, PPP etc)

A business model describes what a firm will do, and how, to build and capture wealth for stakeholders Effective business models operationalize good strategies -- turning position and fit into wealth

FOUR ASPECTS OF BUSINESS MODELS Revenue Sources Cost Drivers Investment Size Critical Success Factors

REVENUE SOURCES Subscription/Membership Fixed amount at regular intervals prior to receiving product/service

Volume/Unit-based Fixed price in exchange for product/service

Advertising-based Exempt from fee or pays fraction of the value

Licensing & Syndication One time fee

Transaction fee Fixed fee or percentage of total value of transaction

COST DRIVERS Fixed: item costs do not vary with volume Semi-variable: variable & fixed costs

Variable: item costs vary with volume Non-recurring: item of cost occurs infrequently

INVESTMENT SIZE Maximizing finance needs Positive cash flow

Cash Breakeven CRITICAL SUCCESS FACTORS An operational function or competency that a company must possess in order to be sustainable & profitable Perform sensitive analysis

EFFECTIVE BUSINESS MODELS BUILD & CAPTURE WEALTH Build wealth: By efficiently (profitably) transforming inputs into something that customers value enough to pay for again and again and again By supporting growth

Capture wealth: By siphoning off some of the accumulated wealth for stakeholders And by developing recognizable value strategic positions, know-how, customers, free cash flow, lifestyles, social impact that can be captured About who matters Owners, investors, family, workers, community About what kind of wealth matters Financial capital, social capital, intellectual capital...ie., cash, good life, rich family life, entrepreneurial impact, social impact About the strategy that will deliver the wealth that matters to the stakeholders that matter

About the structure that supports strategy BUSINESS MODELS START WITH WHAT THE WORLD GIVES 1.Describe the landscape:

Porter Environment, industry, and relevant trends.

2. Paint in competitors: Competitor table. Perceptual maps. What do you need to play? How do competitors compete? What opportunities exist?

3. Identify strengths & weaknesses Vision, skills, core technologies

4. Identify stakeholders you must serve Owners, family, workers, community

5. Identify the wealth you will capture Capital, good life, family life, fame entrepreneurial effectiveness, social value

6. Choose a position or approach And elaborate a strategy to realize this Especially a revenue model

7. Sketch a structure to operationalize the strategy Value chain, activity system, culture, simple rules

8. Work out the implications Functional strategies Timeline and milestones Financial projections & capital needs Path to profitability, sale, or other realization of value

Porters Generic Strategies Overall Cost Leadership Strategy Differentiation Strategy Focused Strategy (low cost or differentiation)

Porter's Generic Strategies Choosing Your Route to Competitive Advantage

Just one strategic option for airlines. iStockphoto/alandj Which do you prefer when you fly: a cheap, no-frills airline, or a more expensive operator with fantastic service levels and maximum comfort? And would you ever consider going with a small company which focuses on just a few routes?

The choice is up to you, of course. But the point we're making here is that when you come to book a flight, there are some very different options available. Why is this so? The answer is that each of these airlines has chosen a different way of achieving competitive advantage in a crowded marketplace. The no-frills operators have opted to cut costs to a minimum and pass their savings on to customers in lower prices. This helps them grab market share and ensure their planes are as full as possible, further driving down cost. The luxury airlines, on the other hand, focus their efforts on making their service as wonderful as possible, and the higher prices they can command as a result make up for their higher costs. Meanwhile, smaller airlines try to make the most of their detailed knowledge of just a few routes to provide better or cheaper services than their larger, international rivals. These three approaches are examples of "generic strategies", because they can be applied to products or services in all industries, and to organizations of all sizes. They were first set out by Michael Porter in 1985 in his book Competitive Advantage: Creating and Sustaining Superior Performance. Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation" (creating uniquely desirable products and services) and "Focus" (offering a specialized service in a niche market). He then subdivided the Focus strategy into two parts: "Cost Focus" and "Differentiation Focus". These are shown in Figure 1 below.

The terms "Cost Focus" and "Differentiation Focus" can be a little confusing, as they could be interpreted as meaning "A focus on cost" or "A focus on differentiation". Remember that Cost Focus means emphasizing cost-minimization within a focused market, and Differentiation Focus means pursuing strategic differentiation within a focused market.

The Cost Leadership Strategy

Porter's generic strategies are ways of gaining competitive advantage in other words, developing the "edge" that gets you the sale and takes it away from your competitors. There are two main ways of achieving this within a Cost Leadership strategy:

Increasing profits by reducing costs, while charging industry-average prices. Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you've reduced costs.

Remember that Cost Leadership is about minimizing the cost to the organization of delivering products and services. The cost or price paid by the customer is a separate issue!

The Cost Leadership strategy is exactly that it involves being the leader in terms of cost in your industry or market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low cost producers who may undercut your prices and therefore block your attempts to increase market share. You therefore need to be confident that you can achieve and maintain the number one position before choosing the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually have:

Access to the capital needed to invest in technology that will bring costs down. Very efficient logistics. A low cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of other competitors.

The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors copy your cost reduction strategies. This is why it's important to continuously find ways of reducing every cost. One successful way of doing this is by adopting the Japanese Kaizen philosophy of "continuous improvement". The Differentiation Strategy Differentiation involves making your products or services different from and more attractive those of your competitors. How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support and also brand image that your customers value. To make a success of a Differentiation strategy, organizations need:

Good research, development and innovation. The ability to deliver high-quality products or services.

Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings.

Large organizations pursuing a differentiation strategy need to stay agile with their new product development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in different market segments. The Focus Strategy Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers within it, develop uniquely low cost or well-specified products for the market. Because they serve customers in their market uniquely well, they tend to build strong brand loyalty amongst their customers. This makes their particular market segment less attractive to competitors. As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally enough on its own. But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is to ensure that you are adding something extra as a result of serving only that market niche. It's simply not enough to focus on only one market segment because your organization is too small to serve a broader market (if you do, you risk competing against betterresourced broad market companies' offerings.) The "something extra" that you add can contribute to reducing costs (perhaps through your knowledge of specialist suppliers) or to increasing differentiation (though your deep understanding of customers' needs).

Generic strategies apply to not-for-profit organizations too. A not-for-profit can use a Cost Leadership strategy to minimize the cost of getting donations and achieving more for their income, while one with pursing a Differentiation strategy will be committed to the very best outcomes, even if the volume of work they do as a result is lower. Local charities are great examples of organizations using Focus strategies to get donations and contribute to their communities.

Choosing the Right Generic Strategy Your choice of which generic strategy to pursue underpins every other strategic decision you make, so it's worth spending time to get it right. But you do need to make a decision: Porter specifically warns against trying to "hedge your bets" by following more than one strategy. One of the most important reasons why this is wise advice is that the things you need to do to make each type of strategy work appeal to different types of people. Cost Leadership requires a very detailed internal focus on processes. Differentiation, on the other hand, demands an outward-facing, highly creative approach.

So, when you come to choose which of the three generic strategies is for you, it's vital that you take your organization's competencies and strengths into account. Use the following steps to help you choose. Step 1: For each generic strategy, carry out a SWOT Analysis of your strengths and weaknesses, and the opportunities and threats you would face, if you adopted that strategy. Having done this, it may be clear that your organization is unlikely to be able to make a success of some of the generic strategies. Step 2: Use Five Forces Analysis to understand the nature of the industry you are in. Step 3: Compare the SWOT Analyses of the viable strategic options with the results of your Five Forces analysis. For each strategic option, ask yourself how you could use that strategy to:

Reduce or manage supplier power. Reduce or manage buyer/customer power. Come out on top of the competitive rivalry. Reduce or eliminate the threat of substitution. Reduce or eliminate the threat of new entry.

Select the generic strategy that gives you the strongest set of options.