Strategic Management: Competitive Advantage and Business Planning

Posted on Dec 21, 2024 in Economy

Competitive Advantage

Competitive advantage is the ability of a firm to win consistently over the long term in a competitive situation.

• It is created by having and managing resources to provide goods and services that meet the following criteria:
  1. They provide superior value.
  2. They are rare— competitors do not provide similar products and services in quality and quantity.
  3. They are difficult to imitate.
  4. They are non-substitutable.

Superior Value

Firms provide products and services that deliver value superior to that of competitors.

• Comparative advantage: The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
• Distinctive competence: A superior product resulting from a unique competence.
• Rarity: No other firm has the capabilities needed to produce the quality or quantity of products and services.
• Difficult to imitate: Firms must try to avoid competitor imitation of capabilities that create superior value for customers. Tangible barriers include size and location. Intangible barriers include company culture and corporate reputation.
• Non-substitutability: Low possibility of substitution, meaning the ability for another firm to fulfill a customer’s need by alternative means. To sustain its competitive advantage, customers find it difficult to find a substitute that equally satisfies their desire for products and services.
• Above-average return: Profit greater than the average for a comparable set of firms.

Vision, Mission, and Objectives

Strategic vision: A view of the firm over the long term that describes what it should achieve in the future. A firm’s vision captures its general identity, direction, and level of aspirations.

Mission statement: Articulates the fundamental purpose of the organization, often containing several components such as:

• Company philosophy
• Company identity or self-concept
• Principal products or services
• Customers and markets
• Geographic focus
• Obligations to shareholders
• Commitment to employees

Objective: Objectives turn the strategic intent and mission of a firm into concrete and measurable goals.

Environmental Analysis

External and internal environments: Know about them – several questions will be asked.

External environment: Can influence the effectiveness of an organization.

1. Sociocultural: Forces consisting primarily of the demographics or cultural characteristics of societies in an organization.
2. Technological forces: Product technological changes that lead to new features and capabilities in existing products, and process technological changes to alterations in how to make products or how to manage enterprises.
3. Economic forces: Current economic conditions affect the demand for products and the cost of producing them. Economic activity tends to move in cycles, and structural changes affect current and future conditions.
4. Political and legal forces: Laws, regulations, and government spending.
5. Global forces: Impact on and interaction with the other forces.
   1. Institutional forces: Country rules, policies, and enforcement processes that influence individuals and organizations.
   2. Physical forces: Involve infrastructure that can affect existing and potential business operations in a country, such as roads, telecommunications, air links, and deepwater harbors.

Porter’s Five Forces

Know about each force – several questions will be asked.

• Porter’s Five Forces focuses on five industry and competitor forces that can significantly influence a company’s performance within an industry.
• Three of the five forces (the nature of rivalry, new entrants, and substitutes) involve competitors, and the other two forces are customers and suppliers.
• Competitors
  • The nature of rivalry: It is important to understand the strength of competitors relative to your firm. If competitors are stronger, they are likely to take actions to gain market share from your firm. It’s important to focus on market segments that competitors avoid to build the strengths of your firm. (Higher profit = less competition)
  • New entrants: The second dimension of the industry and competitor environment is the amount of difficulty firms encounter upon entering the industry. In general, new entrants will increase competition. Increased competition usually produces lower profit margins because customers have more choices. (Higher profit = fewer new entrants)
    • Entry barriers: Obstacles that make it difficult for firms to enter a particular type of business (industry). Larger barriers lead to fewer new entrants. (Higher profit = high entry barriers)
  • Substitutes: This dimension focuses on the extent to which alternative products or services can substitute for existing products or services. It involves an alternative means of satisfying a customer’s need (for example, bus, train, airplane). (Higher profit = few substitutes)

**Look at exhibit 4.4

• Customers: A critical component of a firm’s external environment. Organizations exist largely to serve customers and, thus, managers focus their efforts on satisfying customer needs. When they provide customers with value that is superior to the value provided by competitors, they achieve a competitive advantage. (Higher profit = many customers)
• Suppliers: Managers must try to achieve a power balance with the firm’s suppliers. If one or a few suppliers control a valuable good necessary for the products or services provided by the firm, the supplier will have considerable power. Such a supplier can likely command a premium price or even limit access to the good. (Higher profit = many suppliers)

SWOT Analysis

The SWOT Analysis approach to integrating the separate analyses requires managers to consider their firm’s strengths (S) and weaknesses (W), along with opportunities (O) and threats (T). It helps integrate internal and external analyses.

• Internal: (S)trengths and (W)eaknesses
• External: (O)pportunities and (T)hreats

Internal Environment

Value Chain

Know about each activity.

The value chain consists of a set of key activities that directly produce or support the production of a firm’s products and services offered to customers. Porter separates the internal components of a firm into five primary activities and four support activities.

Primary activities: Activities that are directly involved in the creation of a product or service and distributing it to the customer.

• Inbound Logistics: Activities that are designed to receive, store, and then disseminate various inputs related to the firm’s products or services. Includes raw materials, receiving, transportation, inventory, and information. The use of information technology is of special importance in the management of inbound logistics.
• Operations: The operations component of the value chain includes a variety of activities that transform inputs into the products and services of the firm.
• Outbound logistics: Outbound logistics include activities that move the product or service from the firm to the customers.
• Marketing and sales: Marketing and sales activities are designed to inform potential customers about the products and services the firm has available and entice them to purchase them.
• Service: Service activities are designed to do what is necessary to ensure that the product satisfies the customer after the purchase and to increase the probability of a repeat purchase.

Support activities: Activities that facilitate the creation of a product or service and its transfer to the customer.

• Procurement (purchasing): Procurement is critical in the process to ensure the quality and timeliness of the raw materials needed. Suppliers influence the quality, cost, and timeliness of raw materials delivered to the firm.
• Technology Development: Revolves around expertise and the tools or equipment used in the exercise of that expertise. Although technology development concentrates on product development or process innovation, technology and the means by which a company applies it to tasks also have an effect on all five primary activities.
• Human Resource Management: The process of acquiring, training, evaluating, compensating, and developing human resources is present in all five primary activities.
• Infrastructure: Consists of its planning, finance, accounting, legal, government relations, and other activities supplied by its various primary activities.

Organizational Levels and Different Types of Plans

Planning: A process to determine and implement actions to achieve organizational objectives.

Types of Planning

• Strategic plans: Focus on the broad future of the organization. Incorporating both external information gathered by analyzing the company’s competitive environment and the firm’s internal resources, managers determine the scope of the business to achieve the organization’s long-term objectives. Normally 3-5 years.
• Tactical plans: Translate strategic plans into specific goals for specific parts of the organization. Often have a shorter time frame and are narrower in scope. Rather than the broader aspect of the organization, tactical plans typically affect a single business within an organization and its product lines. Typically 1-2 years.
• Operational plans: Operational plans translate tactical plans into specific goals and actions for small units of the organization. Operational plans typically focus on the short term, usually 12 months or less. These plans are the least complex of the three and rarely have a direct effect on other plans outside of the department or unit for which the plan was developed.

The Organizational Levels at Which Plans Are Developed

• Corporate level: Corporate-level executives focus on questions such as:
  • What industries should we get into or out of?
  • What markets should the firm be in?
  • In which businesses should the corporation invest money?
  • What resources should be allocated to each of these businesses?
• Business Level: Sometimes referred to as the strategic business unit (SBU).
  • Managers focus on determining how they are going to compete effectively in the market.
  • Attempt to address the following questions:
    • Who are our direct competitors?
    • What are their strengths and weaknesses?
    • What are our strengths and weaknesses?
    • What do customers value in the products or services we offer?
    • What advantages do we have over competitors?
• Functional Level: Managers focus on how they can facilitate the achievement of the competitive plan of the business. These managers are often heads of departments such as finance, marketing, human resources, or product development. Attempt to answer questions such as the following:
  • What activities does my unit need to perform well in order to meet customer expectations?
  • What information about competitors does my unit need in order to help the business compete effectively?
  • What are our unit’s strengths and weaknesses?

• Strategic Planning: Corporate level, Business Level
• Tactical Planning: Business Level, Function Level
• Operational Planning: Function Level

Stages in the Planning Process

1. Environmental analysis: Forecasting, Environmental Uncertainty, Benchmarking
   • Forecasting: Making predictions of the future based on past and present data and analysis of trends.
   • Environmental Uncertainty: Turbulent and uncertain environments are common in certain industries and in some countries. A key issue for managers and their planning activities is that the greater the environmental uncertainty, the more flexible their plans need to be.
     • Contingency Plan: Typically identifies key factors that could affect the desired results and specifies what different actions will be taken if changes in key events occur.
   • Benchmarking: Identifying the best practices by your competitors and non-competitors and the results that they produced.

Competitive Strategies

Know about each: cost leadership, differentiation, focused. Several questions will be asked.

• Cost leadership strategy: A firm competes by striving to be the lowest-cost provider of a product or service.
  • Integrated differentiation (cost leadership strategy): A set of actions designed to differentiate the firm’s product in the marketplace while simultaneously maintaining a low-cost position relative to its competitors.
• Differentiation strategy: Seek to make their product or service different from those of competitors on dimensions their customers value. Achieving differentiation allows them to command a premium price.
• Focused strategy: A strategy that targets a particular market segment. The strategy may be a focused cost leadership strategy or a focused differentiation strategy. To succeed with this strategy, there must be significant differences among the firm’s targeted customers or among geographical segments of its customers.
  • Customer Segment: A group of customers who have similar preferences or place similar value on product features.
• Multipoint competition strategy: A strategy that involves competing with firms across markets by using strengths in one market to overcome weaknesses in another market.

Gantt Chart

• Gantt Chart: One of the common tools used to graphically display the sequence and timing of specific actions. It shows the sequence in which to complete the actions, whether a preceding action must be completed before a subsequent one can start, and the expected overlap in the timing of specific actions if any exists. In addition to the planned sequence and timing of events, managers can also plot the firm’s actual progress on the Gantt chart. This allows managers to assess their progress against the plan and potentially make adjustments if needed.

Budgets

Know different types.

Managers use a budget to quantify and allocate resources to specific activities. Most organizations propose and set budgets on an annual basis, and they address a variety of issues.

• Capital expenditure budget: Specifies the amount of money a company plans to spend on specific items that have long-term use and require significant financial investments (e.g., manufacturing equipment, land, and buildings).
• Expense budget: Typically includes all primary activities on which the unit or organization plans to spend money and the amount allocated for each item during the year. (Most profit and nonprofit organizations of a moderate or larger size use expense budgets, both for planning and for control purposes).
• Proposed budget: A budget that outlines how much money an organization needs; submitted to a superior or budget review committee.
• Approved budget: A budget that specifies what the manager is actually authorized to spend money on and how much.

Budgeting Approach

• Incremental budgeting approach: A budgeting approach whereby managers use the approved budget of the previous year and then present arguments for why the upcoming year’s budget should be more or less.
• Zero-based budgeting approach: A budgeting approach that assumes that all funding allocations must be justified from zero each year. (Time-consuming).

Organizational Structure and Design

• Organizational Structure: Can be defined as the sum of the ways an organization divides its labor into distinct tasks and then coordinates them.
• Organizational Design: Is the process of assessing the organization’s strategy and environmental demands and determining the appropriate organizational structure.
• Organizational chart: A graphic illustration of the relationships among a firm’s units and the lines of authority among supervisors and subordinates.

Differentiation and Integration

• Differentiation: The extent to which tasks are divided into subtasks and performed by individuals with specialized skills.
  • Task differentiation: Differentiation by what employees do.
  • Cognitive differentiation: The extent to which people in different units within an organization think about different things or about similar things differently.
• Integration: The extent to which various parts of an organization cooperate and interact with each other.
  • Interdependence: The degree to which one unit or one person depends on another to accomplish a task.
  • Pooled interdependence: When several groups are largely independent in their functions but collectively contribute to a common output.
  • Sequential interdependence: When the outputs of one group become the inputs of another group.
  • Reciprocal interdependence: When two or more groups depend on one another for inputs.
  • Uncertainty: The extent to which organizations cannot accurately forecast future input, processes, and output factors.

Unity of Command and Span of Control

• Unity of Command: The notion that an employee should have one and only one boss. People working in a highly formal organization with a strong orientation to unity of command are likely to have one boss who directs their work and evaluates their performance.
• Span of Control: The number of employees reporting to a given supervisor. More formal organizations tend to have a narrow rather than a wide span of control. The logic for this is that normally the fewer people a manager has to supervise, the more closely the manager can oversee and control them.

Centralization and Decentralization

• Centralized Organization: Organizations that restrict decision-making to fewer individuals, usually at the top of the organization.
• Decentralized Organization: Organizations that tend to push decision-making authority down to the lowest possible level.