LEVELS OF STRATEGIES, PORTER’S MODEL AND STRATEGY DEVELOPMENT (BCG) AND IMPLEMENTATION

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Principles of Management MGT503

Lesson 9.27

LEVELS OF STRATEGIES, PORTER'S MODEL AND

STRATEGY DEVELOPMENT (BCG) AND IMPLEMENTATION

Level of Strategies

Many organizations develop strategies at three different levels. These three different and distinct levels of

strategy are corporate, business, and functional:

Corporate-level strategy is developed by top-level management and the board of directors. The

corporate-level strategy seeks to determine what businesses a corporation should be in or wants to be in.

Two popular approaches for answering the question of what business(es) should we be in are the grand

strategies framework and the corporate portfolio matrix.

These strategies address

What business the organization will be coordinated to strengthen the

organization's competitive position.

How the strategies of those businesses will be coordinated to strengthen

the organization's competitive position.

How resources will be allocated among businesses.

Business-level strategy concentrates on the best means of competing within a particular business

while also supporting the corporate-level strategy.

The distinction between corporate-level and business-level strategy applies

only to organizations with separate divisions that compete in different

industries.

A strategic business unit (SBU) is a distinct business, with its own set

of competitors that can be managed reasonably independently of other

businesses within the organization.

Functional-level strategy focuses on action plans for managing a particular functional area within

a business in a way that supports the business-level strategy.

Functional areas include operations, marketing, finance, human resources

management, accounting, research and development, and engineering.

Functional strategies are usually developed by functional managers and are

typically reviewed by business unit heads.

Coordinating strategies across these three levels is critical in maximizing strategic impact.

The role of competitive analysis in strategy formulation and implementation

Porter's Forces Model:

Michael E. Porter, a noted strategy expert, has devised the five competitive forces model as an approach

for analyzing the external environment for both the nature and the intensity of competition in a given

industry in terms of five major forces.

The model provides an environmental assessment of strategically significant

elements of the organization's task environment.

Rivalry is the extent to which competitors use tactics to lower the profits of their

competitors.

The bargaining power of suppliers is the extent to which suppliers can exert power

over business in an industry by threatening to raise prices or reduce the quality of

goods and services they provide.

Principles of Management MGT503

The bargaining power of buyers depends on the factors such as number of

customers in the market, customer information, and the availability of substitute

which determine the amount of influence that buyers have in an industry.

The threat of new entrants is the threat of a price war if new competitors can enter

the market.

The threat of substitute products or services is the extent to which businesses in

other industries can offer substitute products, thus reducing the profit potential

for the industry.

The competitive environment, in some industries, may reach the point of hyper competition-a state of

rapidly escalating competition. When this happens, environments may become upward spirals of

uncertainty, dynamism, and heterogeneity of players making it difficult for any organization to sustain

competitive advantage.

An organizational assessment determines how organizational factors in the internal environment affect

the competitive situation.

The resource-based strategic view is a useful approach to internal assessment as it

focuses on competitive implications of several sets of organizational resources and

capabilities.

Financial resources include debt, equity, retained earnings, and other

money related matters.

Physical resources include buildings, machinery, and other materials to

operate.

Human resources include skills, abilities, experience, and other work

related characteristics of those associated with the organization.

Organizational resources include the history, relationships, levels of trust,

and other culture dimensions.

Assessing the competitive implications of these resources and capabilities relative

to the environment involves answering questions about four critical factors.

How much value does any resource or capability add?

What, if any, degree of rareness does each resource or capability have

among competing firms?

What is the degree of imitability by competitors of each resource or

capability?

Is the organization of the firm's resources and capabilities by the formal

reporting relationships, the control and reward systems, and other factors

such so as to achieve the best competitive advantage?

Achieving sustained competitive advantage requires both the development in industries in which

competitive forces are favorable and upon the development of resources and capabilities that are valuable,

rare, and are difficult to imitate. When a firm has valuable, rare, and difficult to imitate resources and

capabilities, it is said to have a distinctive competence.

Formulating corporate-level strategy

A grand strategy (master strategy) provides the basic strategic direction at the corporate

level of the organization. Four grand strategies have been identified.

Growth strategies are grand strategies that involve organizational expansion

along some major dimension.

Concentration focuses on effecting the growth of a single product or

service or a small number of closely related products or services.

Principles of Management MGT503

Market development is gaining a larger share of a current market

or expanding into new ones.

Product development is improving a basic product or service or

expanding into closely related products or services.

Horizontal integration is adding one or more business that is

similar, usually by purchasing such business.

Vertical integration involves effecting growth through the production of

inputs previously provided by suppliers or through the replacement of a

customer role (Such as that of a distributor) by disposing of one's own

outputs.

Backward integration occurs when a business grows by becoming

its own supplier

Forward integration occurs when organizational growth

encompasses a role previously fulfilled by a customer.

Diversification entails effecting growth through the development of new areas that are clearly distinct from

current businesses.

Conglomerate diversification takes place when an organization

diversifies into areas that are unrelated to its current business.

Concentric diversification occurs when an organization diversifies

into a related, but distinct, business.

These growth strategies can be implemented through a number of means:

Internal growth occurs as the organization expands by building

on its own internal resources.

An acquisition is the purchase of all or part of one organization

by another.

A merger is the combining of two or more companies into one

organization.

A joint venture occurs when two or more organizations provide

resources to support a given project or product offering.

A stability strategy is a second type of grand strategy that involves maintaining

the status quo or growing in a methodical, but slow, manner.

Small, privately owned businesses are most likely to adopt this strategy.

Some of the reasons for adopting a stability strategy are that it

Avoids the risks or hassles of aggressive growth.

Provides the opportunity to recover after a period of accelerated

growth.

Lets the company hold on to current market share.

May occur through default.

Defensive strategies, the third class of grand strategies, are sometimes called

retrenchment strategies. They tend to focus on the desire or need to reduce

organizational operations usually through cost reductions, such as cutting back on

non-essential expenditures and instituting hiring freezes, and/or asset reductions

such as selling land, equipment, or the business itself.

Harvest entails minimizing investments while attempting to maximize

short-run profits and cash flow, with the long-run intention of existing

with the market.

A turnaround is designed to reverse a negative trend and restore the

organization to appropriate levels of profitability.

A divestiture involves an organization's selling or divesting of a business

or part of a business.

A bankruptcy is a means whereby an organization that is unable to pay

its debts can seek court protection from creditors and from certain

contract obligations while it attempts to regain financial stability.

Principles of Management MGT503

Liquidation entails selling or dissolving an entire organization.

A portfolio strategy approach is a method of analyzing an organization's mix of

businesses in terms of both individual and collective contributions to strategic goals. Two

portfolio approaches are used most frequently. Each uses a two-dimensional matrix, and

each may apply to either the existing or to potential strategic business units (SBUs). The

portfolio concept is analogous to an individual's selecting a portfolio of stocks to achieve

balance in terms of risk, long-term growth, etc.

The Boston Consulting Groups (BCG) growth-share matrix compares various businesses in an

organization's portfolio on the basis of relative market share and market growth rate. The corporate

portfolio matrix approach has been a popular approach to determining corporate-level strategy.

The BCG matrix, developed by the Boston Consulting Group, is a strategy tool to guide resource

allocation decisions based on market share and growth of SBUs.

Relative market share is determined by the ratio of a business's market

share compared to the market share of its largest rival.

Market growth rate is the growth in the market during the previous year

relative to growth in the economy as a whole.

The matrix defines four business groups. SBUs plotted on the BCG matrix can be categorized:

The Star has a high market share in a rapidly growing market.

A Question Mark (problem child) has a low market share in a

rapidly growing market.

The Cash Cow has a high market share in a slowly growing

market.

A Dog has a low market share in an area of low growth.

Strategies are suggested by the SBU's position on the matrix.

Use funds from cash cows to duns stars and possibly question

marks.

Divest dogs and less desirable question mark.

The product/market evolution matrix (sometimes called the life-cycle portfolio

matrix) is a 15-cell matrix in which business is plotted according to the business

unit's business strengths or competitive position, and the industry's stage in the

evolutionary product/market life cycle.

While the BCG matrix measures market growth rate the product/market

evolution matrix shows the industry's stage in the evolutionary life cycle.

The maturity and saturation stage is particularly important because it may

last for an extended period of time and is a stage that presents special

challenges to preserve market share while facing the prospect of the

decline stage.

In assessing these portfolio matrixes remember that each model offers a

somewhat different perspective. Portfolio matrices do not provide advice about

specific business within the organization-such specifics are derived at the business

level.

The BCG matrix (and the portfolio concept) has lost much of its merit because:

Not every organization has found that increased market share leads to lower costs.

The portfolio concept assumes that an organization's businesses can be divided into a reasonable

number of independent units.

Contrary to predictions, many so-called dogs have shown consistently higher levels of profitability

than their growing competitors with dominant market shares.

Given the rate at which the economy has been growing and the fact that a market can have only

one leader, well over half of all businesses by definition fall into the dog category.

Principles of Management MGT503

Strategic implications of the BCG matrix are: "milk" the cash cows; invest resources in the stars;

liquidate or sell the dogs; and sell off or invest in the question marks.

Formulating Business-level strategy

Business-level strategies provide advice about specific strategies for various businesses.

Michael E. Porter has developed three business-level strategies that are generic, i.e., widely

applicable to a variety of situations.

A cost leadership strategy involves emphasizing organizational efficiency so that

the overall costs of providing products and services are lower than those of

competitors.

The business should have a cost advantage that is not easily or

inexpensively imitated.

Managers should consider making those product or service innovations

that are most important to customers.

A differentiation strategy involves attempting to develop products and services

that are viewed as unique in the industry.

Differentiation may occur in brand image, technology, customer service,

features, quality, and election.

Costs are not as important as product or service uniqueness.

A focus strategy entails specializing by establishing a position of overall cost

leadership, differentiation, or both, but only within a particular portion, or

segment, or an entire market.

Formulating functional-level strategy

Strategies at the functional level are important in supporting a business-level strategy.

Functional areas develop the distinctive competencies that lead to potential competitive

advantages.

Strategy Implementation

Strategies at the functional level are important in supporting a business-level strategy.

Functional areas develop the distinctive competencies that lead to potential competitive advantages.

Strategy implementation includes the various management activities that are necessary to put the strategy

in motion, institute strategic controls that monitor progress, and ultimately achieve organizational goals.

Managers need to synchronize major factors within an organization needed to put a chosen

strategy into action.

Technology is the knowledge, tool, equipment, and work technique used by an

organization in delivering its product or service.

Human resources are the individuals who are members of the organization.

Reward systems include bonuses, awards, or promotions provided by others, as

well as rewards related to internal experiences, such as feeling of achievement and

challenge.

Decision processes include the means of resolving questions and problems that

occur in organizations.

Organization structure is the formal pattern of interactions and coordination

organizational goals.

Principles of Management MGT503

Managers need to be able to monitor progress through strategic control.

Strategic control involves monitoring critical environmental factors that could

affect the viability of strategic plans, assessing the effects of organizational

strategic actions, and ensuring that strategic plans are implemented as intended.

Strategic control systems include information systems that provide feedback on the implementation and

effectiveness of strategic plans

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