MBA

Module II

Strategic Analysis and Choice

Draft Assignment

Date: 07th January, 2008 Name: Joseph Madapalli Kunnel Student Number: 069021788

TO DO Table of contents Headings References Critical evaluation of the theory and examples.

This essay is a strategic analysis of how the companies respond to changes in their internal and external environments. Also that companies often plan to use such strategies to gain a competitive advantage over their various competitors since an edge over the others always helps them stand at the highest peak and successfully manage to balance and avoid falling disastrously. Often companies plan and forecast but the actual result is different from the forecasted one. Theories are often good to study and get a proper understanding of the situation but they do not necessarily fit in real life. Uncertainty is part of life and a proper analysis to take a decision is important for companies. Thus this essay is an analysis of how companies respond to various changes in their respective environments and how they aim to achieve a competitive advantage simultaneously. Environment Internal factors: Companies have to keep in mind the internal factors before taking any kind of strategic decision that might change the company. The first and most important factor is their marketing mix since it involves the product and its properties like pricing, placement and promotion which eventually affect their financial position and base of the company. Second, the people working in a company are important because without their support it is impossible to carry out any plan successfully. A company without its people is useless. Third, the finance of the company is essential because it is important for a company to know their expenditure budget and the amount they can afford to risk for future development. Obviously, it is dumb to spend more than one can afford. Lastly, the production processes have to be considered since it is important to know if the company is capable of producing the desired results or not.

External factors: These can be effectively analyzed with the PEST analysis and the SWOT analysis of the company. The PEST analysis can be used to analyze the external environment of the company and whether the companys strategic plans are successful or not in helping them to gain competitive advantages over their competitors. The analysis includes political, economic, social and technological factors. Political factors affect the marketing and strategic growth plans of a business. Legislations and regulations of a country affect the plans of the business. This can be control of ingredients used, price changes and different views of the party in power compared to the former one. For e.g. in Pakistan, after the emergency was imposed on 3rd November 2007 the media was curbed and shut down until they signed a deal not to talk against the present government. Thus, GEO Pakistan a channel that is aired in Pakistan, Dubai, UK, USA and Canada. This organization is a multinational since it is aired in three continents around the world. The company uses all the latest technology in media like news room automation service, graphics system, automated play out system, media server systems, GEO firsts (interactive program) and training on international standards; and it is a market leader at home in Pakistan. It is huge since it employs the most people in Pakistan. The company is young. The company is family owned. The channel refused to abide by the regulations and has not been aired in Pakistan up till now. The channel was a leader in the market but now they have suffered huge losses due to the close down of the channel. Eventually, they had to abide by the regulations to avoid further losses and downsizing of employees. Now the channel will be aired soon. This example is a fitting example in this case because their strategic intent was to provide the true story behind the scenes on the political front and this was their edge over the others since GEO is known

for its blunt and bold remarks against the ruling government. But the regulations imposed after the emergency toppled their plans and now they have apologized to the President so that the channel can aired in Pakistan once again. GEO was following the industry norms by gaining an edge over the others and growing simultaneously but the political factors hindered in their plans and the actual results are now different. A wide range of economic factors affect the companys strategic plans to grow and follow the industry norms. These include changes in interest rates, GDP, GNP, exchange rate and international trade. For e.g. McDonalds is an established multinational fast food chain which is privately owned and is huge in terms of people and assets and the organization has to adapt to every countrys own economic factors while making pricing decisions. They have to consider the inflation rate, GDP and GNP of the respective country in which they are operating in before setting prices. Social changes also have consequences for strategic growth plans of a company. Population, the changing role and empowerment of women and the decline of nuclearfamilies have to be taken into consideration before taking any such decisions. Since women are flooding the business arena the shoe companies have found a new market for professional and stylish shoes especially for the working women. For e.g. ECCO is in the sports shoe making business but since people are now more into working, earning money and business than sports so they planned to grow in their market with an edge over their competitors. They are a private company established in 1963 in Denmark; they are a large company in terms of assets since they are a multinational. The company has now launched shoes especially for businesswomen and they have stated that business is a performance sport. They stuck to their original theme (sports) and still catered to the

new markets due to the social changes around the world. This was a creative way of finding a way to expand in their market while sticking to their original theme. Thus, they do have a competitive edge over their competitors since they stepped out of extreme sports and plunged into the new market with the same fervor. Technological changes affect the strategic plans of growth of a company as well. These changes determine the product life cycles of a company. For e.g. Japanese mobile phone companies have to come up with a new technology every three months. They are a leader in the cell phone market and mobile culture is an essential part of their lives. There are a number of mobile phone companies there and since the supply has to be higher than the demand, the phones are the cheapest in Japan than in any country around the world. Thus, the companies have to keep up with the pace to survive. It is hard for companies to gain competitive advantages in this case because the market is flooded with companies and in fact the mobile market in Japan is a perfect market and since prices have fallen down to a competitive level. Growth is difficult to achieve in this market. A SWOT analysis helps respond to changes in the external environment and gain competitive advantages through growth strategies that help use ones strengths to ones advantage, to make effective use of opportunities at the right time and to overcome weaknesses and threats. When one knows and understands ones strengths, weaknesses, opportunities and threats then these can be used to gain competitive advantages in the market. Competitor analysis A competitor analysis is essential to know and understand ones competitor. Since knowing ones competitor helps to take informed decisions and also to make effective

strategic growth plans. When one has complete idea of the opponent then adopting industry norms and responding to competitors simultaneously is a lethal weapon a company can acquire with careful planning and goal setting. It is important to identify competitors. Competitors can be other businesses providing a similar service. For e.g. Eurostar a train service in Europe that uses the Channel Tunnel to transport passengers from Britain to continental Europe, can consider airline companies offering flights from London to cities such as Paris and Brussels as their competitors. Competitors can also be businesses providing the same product. For e.g. Adidas considers Nike, Reebok and Puma as its competitors in sports shoe wear. Competitors can also be businesses seeking the same or a similar customer need. For e.g. Adidas can consider ECCO as a competitor in this case since they deal in sports shoes but they also cater other markets like professional shoes, stylish shoes for women, children and men. The competitors can be analyzed through Michael Porters model of five forces of competition that affect a business. The forces are as follows: Threat of substitute products: When competitors continuously come up with new substitutes for a product that are better and cheaper than the demand for the product against the competitors substitute product becomes highly elastic. People tend to switch to alternatives in the face of any price increases. Product differentiation is essential to gain competitive advantages and the switching costs to the buyer should be high as a result. For e.g. in Japan a new technology in almost everything around them is

introduced in every three months. Thus, whoever came up with the better and cost-effective technology wins the race. Threat of the entry of new competitors: When profits are high in any market then new companies will enter the market continuously and they will not stop unless there are barriers to entry (patents, copyrights etc), sunk costs, learning curve advantages, absolute cost advantages, differentiation and brand equity. Thus, new entrants have to be stopped through the advantages mentioned above. The intensity of competitive rivalry: At times competitors compete aggressively and at times they compete in non-price dimensions like innovation, differentiation. For e.g. Pepsi and Coca Cola competed against each other aggressively by reducing the prices continuously. This is bad for both the companies since competing aggressively but not being able to achieve any competitive advantages in the face of external changes is a loss to both the companies. The bargaining power of customers: This is the ability of customers to put pressure on the company. For e.g. companies in Japan have to face immense competition and in this case the prices have fallen to a competitive level (perfect competition) thus, the consumer is the king and they can pressurize the companies to reduce their prices further in an attempt to gain a competitive advantage. The bargaining power of suppliers: If the firm produces something that requires some special kind of raw material than the suppliers can take

advantage of this fact by not supplying the material unless the firm pays them more than before. These five forces help analyze ones competitors so that the company can take informed decisions and make growth plans to follow industry norms. If these factors are taken into consideration then a company can achieve competitive advantages in the face of external changes. It is important to examine the strengths and weaknesses of the competitors and this can be done through the critical success factors like money factors (cash flow), acquiring new customers, customer satisfaction, quality, product/service development, intellectual capital, strategic business relationships, employee attraction and retention and sustainability in the long run. This helps identify the competitors objectives and strategies, thus then companies can achieve competitive advantages when they know much about their competitors. Competitive strategies There are three competitive strategies that companies can use to gain competitive advantages in the market. The first being cost leadership, which is to gain a cost advantage over the competitors. Businesses aim to produce the cheapest products compared to their competitors so that their prices are more competitive and lesser than their competitors. This enables them to produce more and sell more than their competitors. Second is differentiation which is producing something very different to what the competitors are producing. Catching the competitors by surprise by producing something different and better than the competitors product. Lastly, focus is important that means targeting certain segments of the

market that will yield the highest profits. Obviously, a company producing clothes for women will concentrate only on women and it depends whether they focus on elite class women or middle class women. Some companies use these strategies to position themselves as a market leader. Market leader strategies like expanding the total market by attracting new customers in different segments or countries, expanding the market share in the existing segment or market and defending current market share to prevent any pilferage of customers are adopted to lead the market. Companies that aim to become market leaders tend to attract and then retain their customers by adding value to their products/services or simply by increasing buyer switching costs. For e.g. Microsoft is the market leader in the software market and they do not allow any competitor to take their place at any cost, they aim to retain and expand their market share continuously. The company produces new software continuously to avoid any switching of customers. Consumers perceive Microsoft to be the best and the leader so they do not dare to switch to cheaper alternatives since then they will be compromising on quality. Some companies with a substantial share of the market aim to pose a challenge to the customers. These companies position themselves with market challenger strategies in the market. These companies hold a second, third or a lower position in the market compared to the leader. These companies are in a position to challenge the leader through direct attacks on the leader with a better marketing mix, differentiation, cost leadership, better focus or innovation. They also challenge the leader with indirect attacks in which the company identifies the

weaknesses of the leader and focuses on them to attack indirectly. Lastly, these firms attack other weaker firms other than the leader to increase their market share. This way they tend to increase in size in terms of assets and people so it is easy to pose an effective challenge against the leader. There are firms that are satisfied by being followers in the market. Such firms follow the market follower strategies since they do not wish to challenge the leader and grow or expand to become a leader. They are satisfied in being followers in the market to earn a stable and humble amount of money. There are three main types of followers in a market: firstly, those who imitate market leaders in every aspect. For e.g. Virgin cola is following the leaders like Pepsi and Coca Cola. Secondly, are those companies that are innovative businesses that lack resources to challenge the leader so they follow the leader to avoid changing the structure of the market. Lastly, are those businesses that are not capable of challenging the leader although they might have resources so they follow the leader. For e.g. Software companies like Apple have no other choice but follow the leader that is Microsoft. Some companies follow the market niche strategies where they focus only on one single segment. They aim to expand only within that segment. For e.g. Rolls Royce, limousines, Ferraris are cars focused only in a niche market that is the extremely elite class. They sell few cars but they are expensive enough to cover all costs and reap huge profits. Such companies operate in their own niche and do not step out of their circle of production.

Strategies for Growth Companies can follow certain strategies that will help them grow in the internal and external environment they are operating in and also to achieve competitive advantages. Market penetration as stated by the Ansoff Matrix is to penetrate in the market to achieve growth in existing markets with existing products. This can be done by increasing brand loyalty like Kelloggs cornflakes has increased brand loyalty through years of experience and also that now it is more of a generic name rather than just a brand name. Encouraging customers to use the product more often is also a way to penetrate. For e.g. people drink milk with their breakfast cereal every morning. Also to encourage customers to use more of the product helps to penetrate. For e.g. a chips manufacturer starts to produce the same chips in either a bigger size or in more quantity. Product development is another strategy for growth that is about producing new products or developing the old product but catering to the existing market only. For e.g. Nestle often uses this strategy as they keep on developing their products, they produce Nestle milk pack but before it was normal milk and now it is low fat and high calcium with calcium lock. Market development is yet another strategy for growth that is about producing the existing product but in a new market. This helps increase market share in different segments. For e.g. Harvey Nichols, a retail outlet in London opened up a branch in Leeds. Diversification is also another strategy for growth that is about producing a new product and in a new market. This helps businesses to move away from

products that are failures or dogs according to the Boston matrix and towards products that serve as stars (high market share) and cash cows (stable market share). It also helps to bring up the problem Childs (that might or might not succeed in the market) and turn them into stars and cash cows. For e.g. the move by Mercedes Benz from huge cars to small, high volume cars in new markets around the world is an example of diversification. The Ansoff Matrix:

Extension Strategies Products have a life cycle that goes from development of the product, introduction of the product in the market, growth (in terms of market share), maturity (stable market share) to saturation (time to apply extension strategies to increase the life of the product) and then decline when the product is out of the market. Extension strategies help extend the life of products and this helps companies gain competitive advantages over their competitors in the external environment. Thus, following industry norms like growth and gaining competitive advantages come with their own pros and cons but extension strategies helps increase the life of products. These strategies include finding new uses of the product, for e.g. the video tape which was previously used for video recorders attached to televisions

was adapted to be used with portable camcorders. Second is finding new markets for existing products, for e.g. Adidas opened up its shops in India and Pakistan, thus catering to a new market with same products. Third is developing a wider product range, fourth is focusing on certain target markets for e.g. mobile phones are targeted to the age group between 18-21yrs old, fifth is changing the appearance or packaging of the product for e.g. chocolates like mars or Kit Kat come in different sizes that include mini, medium, large etc; sixth is encouraging people to use it more frequently for e.g. mobile phones are a necessity and a need now since not having a mobile phone is considered to be tacky; and seventh is changing the ingredients or components of the products for e.g. in 1998 Ford Mondeos were equipped with CD players and air conditioning as a set standard. Benefits of planning and making strategies of growth and gaining an edge The main benefit is that businesses know what is going on around them. They are aware of what their competitors are up to so they can plan and make strategies to gain competitive advantages and grow as a company. Secondly, it also helps to co-ordinate and integrates the different elements of running a business. Thirdly, it makes sure that all resources of a business are being utilized fully to the advantage of the business. Fourthly, it is easier to set targets and goals for a business since they are fully aware of their competitors and all the other aspects of a business. Fifthly, planning encourages employees and motivates them to work more since they have focused and set goals to achieve. Lastly, it helps them achieve competitive advantages and grow eventually meeting industry norms.

Problems with planning Plans do not always materialize as they were intended to initially. Due to certain reasons the strategic intent and actual result differ a lot. For e.g. British Airways won an award for best advertising campaign in the past but those campaigns did not lead to any improvement in sales. Misplaced priorities lead to focus on unnecessary things which leads to failure of a plan is also a problem faced by businesses. The success of a plan depends on the resources of a business and how it is being carried out. Complex strategies in books vs. real life problems Strategies are mentioned in books but they do not necessarily apply to real life problems. For e.g. it is not necessary that all these strategies are a success like in the case of Chinese mobile phones like Bird etc although were launched with very low prices and they were loss leaders but they could not survive in the Japanese markets because there people want cheap phones but with latest technologies and good quality. Conclusion Thus, businesses aim to grow and gain competitive advantages since expansion is an industry norm but then they have to face problems while operating in the internal and external environments and these businesses tend to use these strategies to their best advantage and even by manipulating these at times to fit their conditions and markets. This helps them grow and gain an edge over their competitors. Competitive advantages are essential to businesses for continuous growth in the existing and new markets in order to expand and turn into giants.

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