Before talking about the Porter five forces model of competition, lets see the levels of strategies. Strategies are developed on three levels of the organizations. These levels are distinctive from each other listed as corporate level, business level and functional level of strategy. Remember before developing and making any plan, organizations always take the care the SWOT Analysis of the market.
Levels of Strategy
- Corporate-Levels Strategy
Top level of management and the board of directors develop this strategy. It defines the businesses in which the corporation wants to be a part of or should be a part of. There are two popular techniques, used to solve the issue of what should be the business of the organization, strategies framework and portfolio matrix of corporations. Probably, corporate level strategy focuses on:
- Businesses of organization for Sustainability and empowerment of competitive status of organization.
- Coordination of the strategies to increase the strength of the competitive position of the organization.
- Allocation of resources among-st the businesses.
- Business-level Strategy
While in help of corporate-level strategies, it also focuses on the best methods of competition with a specific business that is known as business levels strategies. Some important features of business level strategy are as under:
- Difference among the corporate level strategy and business level strategy only applies to those organizations, which have separate divisions to compete in various industries.
- Strategic Business Unit (SBU) is an exceptional business, having a specific group of competitors. Within the organizations, it may be directed independently than other businesses.
- Functional Strategy
Its focus remains on the action plans of management for a specific functional area of the business in such a way that it helps business-level strategy to implement Business Plan.
- Engineering, Human Resources Management, Finance & Accounts, Marketing, Operations, Research and Development are the functional areas.
- Usually, functional managers develop the functional strategies that are reviewed by the heads of various units.
Formulation and Implementation – Porter Five Forces Model
A well-known strategy expert, Michael E. Porter has formulated a model of five competitive forces model, which is commonly known as Porter five forces model. It is a technique, used for analysis of the external environmental nature and competitive intensity of an industry.
- This model offers the assessment of strategically important environmental elements of the organizational tasks.
- Competitors use rivalry tactics to reduce the profit of their competitors to an extent.
- The bargaining of suppliers threatens the industry, because they have the ability to impure goods and services or increase the prices.
- The bargaining strength of customers depends upon certain conditions of their number in market, information and replacement of availability to know the influence of buyers in the industry.
- If the new competitor enters the market, it also terrifies the reduction in the price level.
- Profit strength of an industry is reduced due to the entrance of new industry, offering same product or service.
A state reached at the rapidly increasing competition, may start in the competitive environment of some industries. At that point uncertainty, enthusiasm and diversity of players create difficulty in the sustainability of competitive advantage for an organization.
The influence of the organizational factors of internal environment over the competitive state can be determined by Organizational Assessment.
01- For internal assessment, resources-based strategic view is the best technique, because it has focus on competitive suggestions for various groups of resources along with capabilities of an organization.
- Equity, Debt, Preserved Earnings, and all money related issues are concluded as financial resources.
- Buildings, machinery, equipment and raw material to be processed, are physical resource of the organization.
- All the work related features such as experienced, skilled and able persons are included in the category of human resources of the organization.
- Cultural dimensions trust levels; interrelationships and history are included in the organizational resources.
02- Answers to the questioning of four critical features relate to the environmental capabilities by assessing competitive suggestions that questions are:
- How much is the value added by any capability or resource?
- What is the level of capability or resource affecting the organizational competition?
- How much capable are the competitors of those resources?
- Does the organization have the capability and resources along with factors such as the reward system, controlling system and proper reporting of relationships?
03- Organizations require development of industries with competitive forces along with development of capabilities and resources that should be difficult in imitability and very rare to achieve and sustain the competitive advantages. These organizational efforts are termed as the distinctive competence of the organization.
Formulation of Corporate-level Strategy
While formulating corporate level strategy, we may easily divide it into two parts Grand strategy and portfolio strategy.
- Grand Strategy
It is also called as master strategy. Fundamental strategic directions at corporate grounds of an organization are provided by Grand Strategies. There are four grand strategies:
This is the first type of Grand Strategy. Organizational growth with several major dimensions comes through these strategies.
01- Concentration: Growth of products, services, or related features are affected by concentration.
- To avail large shares of continued market or expansion of new shares is the Market Development.
- To improve products, services, or related specimen is called as Product Development.
- Addition of similar businesses (commonly purchase of such businesses) is the Horizontal Integration.
02- Vertical Integration: It affects the growth of outputs from producing inputs that are offered either by suppliers or by customer’s replacements or by own previously disposed outputs. It is the Vertical Integration.
- Growth of a business, supplied by owners is termed as the Backward Integration. While,
- The organizational growth is called as Forward Integration, when previous customers are included as suppliers.
03- Diversification: It describes as the growth affected by the development of new distinct areas, which are completely different from the running business.
- Organizational diversification of completely non related areas of the currently running businesses is called as corporative diversification.
- Concentric diversification is the result of diversification of an organization in similar, but distinct areas of business.
Several ways are there to implement those growth strategies:
- Internal growth of an organization results when its building is expanded by its own resources and internal capabilities.
- Purchase of an organization or its partition is known as Acquisition.
- Two or more than two organizations, when combined as one, are called as Merger.
- Two or more organizations working on completion of one project or support on offering one product are the Joint Venture.
It is the second type of Grand Strategy. Stability strategy possesses maintenance of status or slow growth in a pattern.
01- Small businesses or privately owned organizations follow this strategy.
02- Adoption of this strategy is due to following reasons:
- To avoid the threats and dangers of excited growth.
- After excited growth, it enables the recovery factor.
- The organization is in strength of holding going on market shares.
- Defaults may occur also.
It is the third type of Grand Strategy that is sometimes called as retrenchment strategy. Desired needs to minimize the organizational operation by cost reduction are achieved through defensive strategy. Cost reduction is to cutoff non essential expenses along with freezing of employment number, sometimes reduction of assets by selling some of the properties of organization such as land, machinery, equipment or industry itself.
- Harvest: It demonstrates to minimize further investment by increasing the short-term profits along with cash current. It provides the long term existence of the organization in the market.
- Turning around: turning of negative values by restoring appropriate profitability levels of the organization is known to be turning around.
- Divestiture: By selling partition or single business of the organization that is low profit one is called as the Divestiture of an organization.
- Bankruptcy: Bankruptcy is the way of to seek the protection of court from creditors along with some contractors to get some extra time by the organization. Bankruptcy is done for regaining of financial stability of the organization.
- Liquidation: To dissolve or to sell out complete organization is called as the liquidation of an organization.
- Portfolio Strategy
It is a technique or method, used to analyze strategic goals of an organization having mixed businesses. Mixed businesses are referred to as individual and collective cooperation for achieving the goals. Portfolio Strategy applies two techniques that are used very frequently. Two dimensional matrixes is used by individual technique along with the application of existing or potential SBUs (Strategic Business Units). This method is non automatic one in which an individual selects portfolio stock to achieve targets in accordance with long term growth and risks etc.
Growth-Share Matrix by Boston’s Consulting Groups (BCG)
It evaluates several businesses of an organizational portfolio on behalf of market growth and market share rate. In the determination of corporate-level strategy approach of the portfolio, matrix is very famous.
- Boston Consulting Group Matrix is tool of strategy used to guide the decisions allocated by resources, is based upon growth of SBUs and market share.
- The ratio of market share of a business in comparison with its highest rival determines the relative market share.
- Growth of market shares from previous years in relation to the growth in complete economy is known as market growth rate.
The matrix is defined as several business groups. BCG matrix categorizes the SBUs as follows:
Star: It means that market shares are higher in excitedly growing market.
Question Mark: Low rates of market share are indicated through it in the slight growth of the market.
Cash Cow: It highlights the slow market growth, having high market shares.
Dog: It represents having low market shares in the highly growing market.
SBUs location upon the matrix proposes the strategies.
- Usage of funds through cash cow, slowing down the stars and question marks
- Deprivation of dogs along with question mark (less desirable).
Evaluating Product/Market Matrix
Sometimes, it is known as life-cycle portfolio matrix, which plot a business after seeing its strength or competitive position along with organizational state of evolutionary life-cycle for product/market.
- Product/Market evolutionary matrix demonstrates the state of organization in the evolutionary life-cycle, whereas BCG matrix evaluates the market growth rate.
- Maturity stage of a product is very significant while facing the outlook of decline stage. It is because of the lasting enlarged period and that stage provides special challenges for preservation of market share.
One thing must be remembered in assessment of portfolio matrixes that every model provides a bit different potential, but they do not support advice’s for particular businesses in an organization. Those specifics are resulted at business level.
The portfolio concept along with BCG matrix has loosed much of its value due to:
- The increase of market shares, there becomes the reduction in cost, is not found in all of the organizations. Some organizations develop inverse factors.
- The assumptions of the portfolio concept that businesses of an organization can be divided into the independent units.
- Many dogs have resulted in higher profit levels with increased market shares than their competitors.
- Provided rates of the economy have grown and the market has only one leader, so more than the half of businesses within an organization fall in the category of dog.
- Milking of the cash cow, investing resources in stars, liquidation of dogs and the sale off the question marks or invest more on them, is the strategic implementation of BCG Matrix.
Formulation of Business-Level Strategy
Formulation of business level strategies under porter five forces model demand the following things to follow keenly.
- Advice’s about particular strategies for a variety of businesses.
- Three levels of strategies were formulated by Michael E. Porter, whose applications are of various situations and generic.
Cost Leadership Strategy
Due to the application of cost leadership strategy final costs of products and services become lower than those of the competitors, it is very essential for an organization.
- By using this strategy business gains the cost advantages in the market.
- The management should think of making the products and services so innovative that have more importance towards the customers.
This strategy is involved in the efforts of development of products & services being unique in the organization.
- There may be the difference in technology, brand image, features, quality, election and customer services.
- Cost in not of the importance in consideration with that of quality of product or uniqueness of services.
It demonstrates the specialization of establishing overall cost leadership and differentiation at a certain position or both, but only a specific proportion, segment or an entire market.
Formulation of Functional-Level Strategy
While formulating the functional level strategy while porter five forces model, you need to remember these two important features of functional level strategy.
- Functional-level strategies are significant in support of a business level strategy.
- Distinctive competencies are formulated by functional areas that make the way towards effective competitive advantages.
A variety of managerial activities are necessary for putting strategies in action, monitoring progress through organizational strategic controls, and achievement of organizational goals, are included in strategic implementation.
- Synchronization of major features throughout an organization is compulsory for putting the selected strategy in action by the managers.
- For the delivery of products and services by an organization, technology is widely used such as tools, techniques, equipment, machinery and knowledge etc.
- Working individuals, members and employees of the organization are classified as human resources of an organization.
- Awards, bonuses and promos, included in the reward system, should be given for achievement of any challenge to enhance and boost the work efficiency of the human resources of the organization.
- Resolution of issues, problems and questions arising in an organization is included in Decision Processes.
- Special design of interactions along with coordination formulated by managers for linking the responsibilities of members and groups for the achievement of organizational goals is under the organizational structure.
- Management needs to monitor progress through the strategic control. It contains the critical environmental features which can affect the strategic plans. Organizational assessment of strategic actions and insurance of strategic plans in implemented as they were planned.
An Information system for the provision of feedback on implementation and influence of strategic plans always works under the Strategic Control Systems.