Category Archives: Strategy Theory

Theory discussion

Comparison of Business Strategy Frameworks

Strategic management literature has established multiple popular frameworks which are used by decision makers to develop a roadmap for business strategy. Some of the popular frameworks for business strategy are Porter’s 5 forces model, BCG / GE McKinsey MatrixPEST analysis and the Ansoff Matrix. However, all these frameworks focus on factors which are external to the firm. In this article, however, we focus on the frameworks which are a mix of the external view of the macro-environment and the internal view of the strengths and weaknesses existing within the firm, namely the Industry Structure view, the Resource based view and the Relational view of the firm.

The Industrial Structure view is somewhat more macro-industry focused. It postulates that firms operate in an environment of competitive forces of rivalry and forces involving barrier of entry (even exit). In general industry structure refers to the distribution of firms in an industry. The existence of a large number of firms in an industry both reduces and increases opportunities for coordination among firms in the industry. Depending on the degree of consolidation or fragmentation in the industry, the macro-economical dynamics affect the firm’s competency in how it deals with the forces of competition.

In contrast, the Resource based view is somewhat more internal focused. It stresses that the competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal. To transform a short-run of competitive advantage for a firm to a sustained competitive advantage is like winning both the battle and the war. It requires creation of resources which are heterogeneous in nature and not perfectly mobile across competing firms. This again translates into the fact that the value of these resources arise from the criticality that they are neither perfectly imitable nor substitutable without great effort.

Similarly, the Relational view is a theory for considering networks and dyads of firms interlinked within the daily intercourse of business transactions, as the unit of analysis to study and frame strategies for sustainable competitive advantage. The relational view argues that idiosyncratic inter-organizational linkages are the sources of competitive advantage, whereby relationships play a major role in development and exploitation of competencies in an industry that is traditionally highly competitive.

In the next diagram, a comparative analysis of these important theories has been presented., which present how these theories are not only different, but also complement each other by taking a different lens to view the competitive landscape for a strategic decision maker.

Do let us know, if you have any query regarding more details on this article. We value the feedback from our readers very highly.

BSC – The Balanced Scorecard

The Balanced Scorecard (BSC) is a framework for strategic management, used to monitor and align performance of an organization or a division of the same. It is a semi-standard yet more or less structured report, supported by some established design methods and tools, that can be used by management executives to keep track of the execution of plans / assignments by the staff within their control and to evaluate the possible consequences arising from the execution of these plans. Introduced by Robert Kaplan (Harvard Business School) and popularized by Bain & Company, the Balanced Scorecard has become one of the most popular frameworks for project monitoring and management and align the same to the vision and mission of the organization, be it an industrial, government, or nonprofit organization.

Ref: Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System”, 1996, Harvard Business Review, Vol. 76.

There are 4  major process that needs to be balanced in BSC:

  1. The Learning & Growth process
  2. The Business process
  3. The Customer process
  4. The Financial process

The learning and growth process involves all the plans and programs an organization or a department is undertaking in terms of training and development related to both individual and corporate self-improvement. It extends the concept that in a knowledge based organization,people or the human resource is the most critical resource to organizational development.  This section posits the use of metrics to evaluate performance, progress and development of the human resources of an organization.

The Business Process takes into consideration to develop metrics to measure the performance of the internal processes of an organization. It helps to map development in process efficiencies with incremental changes in internal processes. Process management metrics and workflow management metrics are used in this process to evaluate performance vis-a-vis improvements. Incremental improvements the the processes in terms of meeting targets (say process efficiencies) are measured and how the implementation of plans to meet such targets were conducted, is scrutinized in this process.

The customer process takes into account the philosophy of customer orientation in an organization. In current times, there has been an increasing realization of the importance of customer focus and customer satisfaction in any business. The focus in this process is predominantly Customer Lifetime Value management and in the next stage, harness the Customer’s network value. Incremental improvements in each objectives in terms of meeting targets is measured and how the implementation to meet such targets were planned, is scrutinized in this process.

The financial process is another crucial dimension in the BSC. Although managers using the BSC do not have to rely solely on short-term financial measures as the most important indicators of the division’s performance, financial measures are none the less, extremely relevant and are often recognized as the most critical process by many practitioners. Measures such as financial ratios, total revenue from sales, total cost, cost structure improvements, and indirect sources of revenue are scrutinized against their targets, in this process.

These processes are mapped against each other to check how the organizational vision and mission are being adhered to within a division while implementing ploys and strategies. These help in providing a way to construct a concrete step-by-step path of development for the executives of a division or of an organization.

However, the limitation of the Balanced Scorecard is that it has been severely criticized by scholars  for its inability to link a company’s long-term strategy with its short-term ploy. It has become overused in many organizations, sometime not in the most desirable way, as it was conceived when developed.

 

industry, government, and nonprofit organizations

PEST Analysis

PEST analysis stands for “Political, Economic, Social, and Technological analysis“. It is a framework for Strategic analysis of markets to evaluate macro-environmental factors used in the environmental scanning component. Some analysts add the Legal factors to the analysis.

Thus when the PEST analysis is expanded to incorporate legal and environmental factors; this is called a PESTLE analysis or a PESTEL analysis.

  • Political factors pertain to how the government intervenes in the economic functioning of the country (market) and more specifically how it affects the firm strategic decision making. Political factors such as tariffs, tax policy, labor laws, trade restrictions,environmental law, and political stability. Political stability is a major factor which affect the firm’s strategic decision making and overall legal framework.
  • Economic factors consists of interest rates, government bond rates, risk free rate of interest, economic growth, inflation rate (adjusted) and exchange rates.  These factors have major impacts on how a firm can operate in a market. Inflation rate and potential GDP affect the demand and prices of goods.
  • Social factors include the cultural dimensions of the population in which the firm will operate and include gender consciousness, gender based product/service bias, population growth rate, age spread, health consciousness, career attitudes and risk appetite of the target segment.
  • Technological factors consists of factors such as research and development focus in general industries, intellectual property protection laws, technology adoption rates, change assimilation culture, automation and the rate of technological change. They affect entry barriers, technology enabled products and service assimilation,  product prices, quality, and innovation.
  • Environmental factors consists of factors like ecological and environmental aspects such as forestry  and  climatic conditions which may especially affect industries such as tourism, farming, and insurance.
  • Legal factors focus on discrimination laws, intellectual property protection laws, labor laws, consumer laws, antitrust laws, employment laws, health laws, safety laws and social security laws which can affect how a firm operates, its bottom-line (cost structure) and the demand and distribution for its products and services.

The PEST framework has been recognized as an extremely popular framework for market analysis. It is a part of the external analysis conducted while demonstrating an in-depth strategic analysis during new market entry or doing market research for a new product launch or even sometimes during a product extension, and gives an overview of the different macroenvironmental factors that the company has to take into consideration. It is a useful theoretical tool for estimating market growth or decline, business position, potential and direction for operations.

It is an important complementary extension of the Marketing Mix strategies and often it is used as an alternative analytical tool for Porter’s 5 forces model (although not appropriate for the same).

 

Value Creation Strategy – Business Model

To create sustainable, long-term value for all the stakeholders of a firm, it is important to explicitly establish an appropriate stakeholder value target. However what would constitute the “success” condition for all the stakeholders of a firm would vary from the goals of individual stakeholder. For an investor in a firm, value may be seen as through higher market price of his stocks and bonds, where as, for a mid level worker, value may mean better returns in terms of satisfaction from the job, maybe in terms of pay grade improvements or in terms of job satisfaction. Although, what constitutes “value creation” may be dependent on stakeholder perception, for a generic strategic framework, there is a need to conceptualize a generic framework to achieve a target so the value may be created for the firm as a whole, in strict strategic sense.

The key to reach this target and achieve a sustainable competitive advantage is the alignment of business strategy, financial strategy, technology strategy, marketing strategy and investor strategies. One such model developed in strategic management literature is that of Strategy Maps.

In Strategic Maps framework, value is created through 3 main organizational resources, namely Human Capital, Information capital and Organization Capital.

As depicted in this model, value for a firm is essentially created through the interaction of  four processes, namely, “Operations management processes“, “Customer relationship management processes“, “Innovation processes” and “Regulatory and Social processes“. Under each process, there are lots of transaction level processes which create value. Monitoring and strategizing on the value creation of  transaction level processes is the functionality of Mid Level management in the organization which may be termed as “Ploy for Value Creation“. Focus here could be “Ploys” for improving cost structure or improving asset utilization within the firm. The objective at this level is to focus on productivity enhancing strategies.

For the executive senior management, strategy formulation for the purpose of “Value creation” would have a different focus. Their objective could be to expand the revenue opportunities through entering a new marketdecide a growth strategy for a product or market, or focus on Business Diversification strategies. In short, the role of the executives would be to evaluate various growth strategies for the firm, which could lead to huge revenues and thus economic value creation in the near future, upon realization of the plan post implementation of the strategy.

There are many other strategic frameworks for the creation of value for businesses which have their individual merits and limitations.  Another popular framework for value creation is that of Prahlad et al. (2004)

Do let us know if you have any query.

 

Market Entry Strategy for International Business

An international market entry strategy is defined as the planning and implementation of delivering goods or services to a new target international market. It often requires establishing and further managing contracts in a new foreign country. Few firms successfully operate their business in a niche market without ever planning to expand into new markets (mostly due to the localized nature of their Business) but most firms strive to expand through increased sales, brand awareness and business stability by entering a new market. Developing a win-win market entry strategy involves a thorough analysis of  multiple factors, in a planned sequential manner.

For a generic framework for Market Entry Strategies read our article here.

There are 2 basic Strategic Frameworks for Market Entry Strategies which are all dependent on Product type and the Product Lifecycle.

These frameworks have been developed built upon the theories of Innovation Diffusion Models in monopoly and a competitive Game Theory frameworks based on theories of Business Economics.

Market-Entry-Framework

The Waterfall Strategy

In a Waterfall strategy, the business is spread in international markets sequentially. First a firm enters a new market and establishes an identity in the same. Establishing an identity involves estimation of potential market size and revenue patterns, identification of target segment, creation of brand awareness, identification and creation of possible distribution channels and finally formulation and implementation of sales strategy. All these strategies at individual stage is dependent on the product type and the life cycle.

Once the product identity is established in the new market, the learning from the same is utilized to expand into another new market, somewhat with similar structure, sequentially. Learning is an iterative process in such a strategy formulation and it is a less risky process of expansion of business.

Typically, products with a longer product life-cycle or in the maturity phase would follow a Waterfall Strategy, for expansion into new markets.

 

The Sprinkler Strategy

Markets are approached simultaneously in the sprinkler strategy. While this is a more risky strategic framework for entering new markets, typically it is more suitable for products with a shorter life cycle (like Technology products) or are at the Introduction and Growth Stage of the Product Life Cycle. In such a strategic framework, markets are entered simultaneously and often a Skimming Product Pricing strategy is used to generate as much profits as possible from sales. Experiences from market responses are limited to individual markets and the same are not replicated in the other markets.

 

While there is a third Strategic Framework (Namely the Wave Strategy ), it is much less popular for its limitations.

Have you read the article on the Porter’s Five Forces analysis of industry competitiveness? This is a must-read article for anyone planning to get into a new market.

Ansoff Matrix

The Ansoff Growth matrix is a tool that helps firms decide their product and market growth strategy based on objective analysis of industry structure and product type. It is one of the more popular tools for strategic management analysis, in the scenario of deciding the case for a related diversification of businesses and firms, which itself is a highly risky strategic decision.

The Ansoff Matrix was modeled by Igor Ansoff.  Ansoff was primarily a mathematician and an economist par excellence and is one of the earliest strategic management guru.

While the application has been explained in details in the previous diagram, it is crucial to understand that the Ansoff Matrix is completely a framework for Market Entry Strategy. The framework attempts to minimize the risk associated with businesses attempting to enter new markets.

A major limitation of this framework is that it does not take into consideration the factor of what stage in the life cycle (PLC Curve) the “Product” is currently as, while objectively trying to analyze the best strategy for market entry.

Ansoff-matrix

By the way, did you read out article on the frameworks for market entry strategies

Also do you know how the internet affects Porter’s generic strategy models