Whilst strategy originated in a military context, it has been adopted in a business to address the executive plan of an organisation setting out how it will achieve its goals and objectives. As it needs to be comprehensive, it usually comprises several sub-elements relating to the tactics and operations of the organisation. There are several things which must be considered as part of developing a strategic plan and this chapter covers the most popular tools used to develop such plans, whilst also considering some of the challenges of strategy.
Successful strategies are those which deliver sustainable value for organisations, ideally in a way which cannot be easily copied. The basic principles of strategy are:
- The development of a business goal i.e. providing a product or service which delivers economic value (profitability). It must cost less to produce and sell than the customer is prepared to pay for it.
- It must deliver a value proposition - something noticeably different from anything else a competitor can offer.
- There must be demand in the marketplace. It is possible to stimulate demand and a plan for this should be included within the strategy.
- It must be integrated, fitting business operations, resources, and delivery. People must understand what the strategy is and why it is important.
- It must deliver business objectives. It sets corporate direction in the short, medium and long-term.
- A strategy almost always involves a trade-off (e.g. location, market, or price point). Attempting to delivery everything to customers is likely to be unsustainable.
Strategy must be a well-defined way of a business differentiating itself, which will help the company survive, grow and thrive. This differentiation should also be sustainable, meaning it is difficult for a competitor to imitate the strategy. Although a strategy needs to be a defined plan, it is not a static or fixed document. It must be developed in such a way that unforeseen changes can be accommodated and exploited. Ultimately, corporate agility is required to stay ahead of the competition.
Any strategic plan should determine the vision, mission and goals of the business:
- Vision - the purpose of the organisation e.g. “to be the most innovative firm in the market sector”. Although it should be ambitious, it must also be realistic.
- Mission - the objectives of the organisation e.g. to become the most innovative firm in the sector by investing in learning and development and treating our employees with integrity.
- Goals - how the mission and vision will be delivered e.g. making sure that every employee attends 2 development courses every year.
The purpose of the vision, mission and goals is to ensure that everyone understands the business, its ethos, and its culture. The vision, mission and goals will set the direction and scope for the details of any strategic plan.
No organisation operates in a vacuum. There are always other businesses trying to attract the same customers and it is important for a business to understand its marketplace and continually monitor this operating environment for any for changes. There are a range of external and internal factors to consider and a number of frameworks can be used to help guide thinking and subsequent analyses.
A PESTLE analysis is a step-by-step assessment of critical influences in the external marketplace which can shape a businesses’ strategy. These are:
Political: The main political influences in a market. Understanding the political environment is important, because governments shape market stability, national and regional security and the buying power of customers (e.g. through taxation and subsidies). There are also international issues such as trade barrier and tariffs to consider.
Economic: Understanding the overall economic situation in a marketplace is vital. In uncertain economic times, customers’ discretionary spending generally falls and direct business investment opportunities can be limited. A growing economy may introduce opportunities for the sale of luxury goods, whereas a shrinking economy could increase the attractiveness of discount stores.
Social: Understanding the way that consumers behave is important and in marketplaces where there are different social norms and expectations this will influence business strategy.
Technological: Developed economies typically have an advanced technology infrastructure and consumers are usually comfortable using it to interact with organisations. Whilst such issues may make it easier for a company to interact with customers and meet their requirements, it also introduces challenges such as data privacy and technology security.
Legal: Every organisation must abide by the laws of the countries they operate within and these will vary. Any failure to meet legislative obligations will damage the business.
Environmental: Environmental concerns are becoming increasingly important to consumers, and legislation and regulation regarding environmental compliance is also increasing. Ethical and environmental concerns are now a core element of the value requirements of customers.
A PESTLE analysis considers the external factors which can have a significant impact on business even though the company concerned is unlikely to be able to exert any control or influence over them.
Michael Porter (2008) developed a model to assess the overall level of competition in a marketplace. This Five Forces analysis considers the bargaining power of supplies, the bargaining power of customers, threats presented by new entrants and the threat of substitutes.
The bargaining power of suppliers directly influences the overall cost of producing and providing a product or service. Customers can also have a varied degree of bargaining power, as they can exercise choice over product, price and service reinforcing the need to accurately understand the value proposition they expect. In terms of new entrants, rival firms will try and enter the marketplace by offering a superior or even discounted product or service. This challenge can be reinforced by the threat of substitutes - alternatives that increase the choices available to consumers.
Bringing these factors together provides an indication as to the level of competition being faced, helping inform strategic decisions as to how to meet such challenges.
It is sensible to critically examine direct competitors and Diagram 1 provides an illustrative framework to help guide such an analysis:
This approach can identifying sources of unique value, key attribute or features which can provide sustainable differentiation. For example, competitors may offer cheaper products but offering better quality products at slightly higher prices may offer greater value for customers.
Internal analyses allows an organisation to consider how it can best use resources to deliver its strategic plan. This should also reflect wider competitive pressures to examine how best to offer unique value.
SWOT examines the strengths (e.g. brand reputation), weaknesses (e.g. skills gaps), opportunities (e.g. growth market) and threats (e.g. new competitors) being faced by a company. Corporate strengths can be used to exploit opportunities, whilst weaknesses and threats can also be mitigated by considering how the factors identified in the analysis can offer alternative (strategic) courses of action.
Barney (1991) proposed that organisations can create strategic advantage for themselves if they understand their unique resources. This resource-based view considers factors such as people, intellectual property, brand, or infrastructure to determine which are unique and sustainable. More intangible resources such as intellectual property are likely to be the most valuable resources as they are the most difficult for a rival to copy. It is essential to understand how resources are used to generate value and therefore competitive advantage.
Porter (2004) developed a value chain model and this is shown in Diagram 2:
This model can help organisations to understand where their unique or intangible sources of value are likely to be generated and each step in the process should ideally add further value. Such incremental gains can offer sustained value to customers whilst also creating an operating model that may be difficult for competitors to imitate.
Porter (2004, 2008) suggested four fundamental routes to the development of a sustainable competitive advantage:
- Cost leadership - offering the lowest in the market. Often adopted by large businesses able to benefit from scale economies.
- Cost focus - offering the lowest cost in a specific market segment. The focus is much narrower - perhaps limited geographically and is often used as an entry strategy for new markets (i.e. loss leaders to undercut competitors).
- Differentiation - offering a unique product/service which rivals cannot copy.
- Differentiation focus - differentiation limited to a more local or targeted marketplace.
The VRIO model seeks to consider how a company generates value and how this then relates to their competitive position in the market. Diagram 3 illustrates this concept:
(Management Mania, 2016)
The strategy clock developed by Bowman often provides a more useful insight when considering the delivery of services (Bowman & Faulkner, 1996) and is shown in Diagram 4:
A consideration of the market utilising this model could support the evolution of the following strategy approaches:
- Hybrid: low-cost approaches focussed on consistent service at an affordable price.
- Differentiation: higher price points justified by value to the consumer.
- Focus differentiation: targeting a niche segment to support a price premium.
- Increase prices: used to protect margins against fluctuating costs in times of economic uncertainty.
- Increase prices and reduced value: only really feasible in a monopoly situation.
- Cost leader: Competing only on price and offering little or no additional value.
Organisations may choose to adopt an internal growth plan to expand (e.g. moving into new areas or increasing production) or consider mergers and/or acquisitions. Alternatively, an organisation might choose to form a strategic alliance which is a negotiated agreement with another firm to combine resources to create either a unique product/service or a mutually beneficial relationship. Each organisation retains its distinct identity, unlike a merger or acquisition where a stronger firm purchases a weaker one.
Internationalisation can also be explored in order to develop overseas markets. To minimise risk, this is often done by using an intermediary with an established market presence and local knowledge.
Ideally, organisations should carefully plan their strategies in order to take advantage of their resources and new market opportunities. However, sudden changes in market conditions can create both opportunities and threats, strengthening or weakening the relative competitive positioning of the company concerned. Whilst taking a staged, analytical and deliberate approach to strategy development delivers clear business advantages, a company must remain flexible enough to adapt to these emerging challenges. This reinforces the importance of maintaining an accurate understanding of both internal and external market conditions, regularly reviewing corporate strategy to ensure that it reflects the business environment being faced.
Strategic drift occurs when companies find themselves continually adapting their plans and activities because of market changes and in doing so lose sight of how the business delivers value to customers. This is why it is essential to remain focused on long-term goals and objectives. Whilst minor variations may be necessary, more significant changes should prompt a critical re-evaluation of overall corporate strategy rather than continued revisions to business plans.
This chapter has presented an overview of strategic planning, noting some of the key analytical tools that can be used to support the evolution of a sustainable competitive position. Companies must remain focussed on understanding their value proposition and how this can meet the demands and expectations of customers. However, this has to be supported by an accurate understanding of the corporate operating environment, ensuring that both internal and external factors are considered.
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