Before talking about the Porter five forces model of competition, let’s see the levels of strategies. Strategies are developed on three levels of the organization. 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 care of the SWOT Analysis of the market. So strategy formulation is a technique used for the analysis of the external environmental nature and the competitive intensity of an industry.
Levels of Strategy
The top-level management and the board of directors develop this strategy. Therefore it defines the businesses in which the corporation wants to be a part of or should be a part. 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, the corporate-level strategy focuses on:
- Businesses of organization for Sustainability and empowerment of competitive status of an organization.
- Coordination of the strategies to increase the strength of the competitive position of the organization.
- Allocation of resources amongst the businesses.
While in the help of corporate-level strategies, it also focuses on the best methods of competition with a specific business which is known as business levels strategies. Some important features of business-level strategy are as under:
- The difference between 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 from other businesses.
Its focus remains on the action plans of management for a specific functional area of the business. Particularly in such a way that it helps business-level strategy to implement Business Plan.
- Engineering, Human Resources Management, Finance and 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’s five forces model. Hence it is a technique used for the analysis of the external environmental nature and the 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 prices.
- The bargaining strength of customers depends upon certain conditions of their number in the market, and information. Moreover replacement of availability to know the influence of buyers in the industry.
- If a new competitor enters the market, it also terrifies the reduction in the price level.
- The profit strength of an industry is reduced due to the entrance of a new industry, offering the same product or service.
A state reached 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 the internal environment over the competitive state can be determined by Organizational Assessment.
For internal assessment, a resources-based strategic view is the best technique. Since it focuses on competitive suggestions for various groups of resources along with the 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 resources 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.
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 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?
Organizations require the development of industries with competitive forces. Along with the development of capabilities and resources that should be difficult in imitability. As also very rare to achieve and sustain competitive advantages. Thus these organizational efforts are termed 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.
It is also called a master strategy. Fundamental strategic directions on the corporate grounds of an organization are provided by Grand Strategies. So there are four grand strategies:
This is the first type of Grand Strategy. Organizational growth with several major dimensions comes through these strategies.
The growth of products, services, or related features is 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 specimens is called Product Development.
- The addition of similar businesses (commonly purchased by such businesses) is Horizontal 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. Hence it is Vertical Integration.
- The growth of a business, supplied by owners is termed Backward Integration.
- Organizational growth is called Forward Integration when previous customers are included as suppliers.
It describes the growth affected by the development of new distinct areas, which are completely different from the running business.
- Organizational diversification of completely nonrelated areas of the currently running businesses is called corporate diversification.
- Concentric diversification is the result of the diversification of an organization in similar. However 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.
- The purchase of an organization or its partition is known as Acquisition.
- Two or more than two organizations, when combined as one, are called a Merger.
- Two or more organizations working on the completion of one project or support offering one product are Joint ventures.
It is the second type of Grand Strategy. A stability strategy possesses maintenance of status or slow growth in a pattern. Therefore small businesses or privately owned organizations follow this strategy.
Adoption of this strategy is due to the following reasons:
- To avoid the threats and dangers of exciting growth.
- After exciting growth, it enables the recovery factor.
- The organization is in the strength of holding on to market shares.
- So defaults may occur also.
It is the third type of Grand Strategy that is sometimes called a retrenchment strategy. Desired needs to minimize the organizational operation by cost reduction are achieved through defensive strategy. However, cost reduction is to cut off nonessential expenses along with freezing employment numbers. Although sometimes reduction of assets by selling some of the properties of the organization. Such as land, machinery, equipment, or industry itself.
- Harvest: It demonstrates minimizing further investment by increasing the short-term profits along with cash current. Thus it provides the long-term existence of the organization in the market.
- Turning around: turning off 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 the Divestiture of an organization.
- Bankruptcy: Bankruptcy is the way of seeking the protection of the court from creditors. Along with some contractors to get some extra time from the organization. Bankruptcy is done for regaining the financial stability of the organization.
- Liquidation: To dissolve or to sell out a complete organization is called the liquidation of an organization.
It is a technique or method, used to analyze the strategic goals of an organization having mixed businesses. Mixed businesses are referred to as individual and collective cooperation for achieving goals. Portfolio Strategy applies two techniques that are used very frequently. Therefore two dimensional matrices are used by individual techniques along with the application of existing or potential SBUs (Strategic Business Units). Thus this method is a nonautomatic 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 the corporate-level strategy approach of the portfolio, the matrix is very famous.
- Boston Consulting Group Matrix is a tool of the strategy used to guide the decisions allocated by resources. Actually based on the 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.
- The growth of market shares from previous years in relation to the growth in the complete economy is known as the 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 an excitedly growing market.
Question Mark: Low rates of market share are indicated through it 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 marks (less desirable).
Evaluating Product/Market Matrix
Sometimes, it is known as a life-cycle portfolio matrix, which plots a business after seeing its strength or competitive position. Along with the organizational state of the evolutionary life-cycle for the product/market.
- The product/Market evolution matrix demonstrates the state of the organization in the evolutionary life-cycle. Whereas the BCG matrix evaluates the market growth rate.
- The maturity stage of a product is very significant while facing the prospect of a decline stage. Hence it is because of the lasting enlarged period and that stage provides special challenges for the preservation of market share.
One thing that must be remembered in the assessment of portfolio matrices is that every model provides a bit different potential. However, they do not support advice for particular businesses in an organization. Those specifics are obtained at the business level.
The portfolio concept along with the BCG matrix has loosed much of its value due to:
- The increase in market shares there becomes the reduction in cost, which is not found in all organizations. Some organizations develop inverse factors.
- The assumption of the portfolio concept is that the businesses of an organization can be divided into 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. Thus more than 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 of the question marks. Nor investing more in them is the strategic implementation of BCG Matrix.
Formulation of Business-Level Strategy
Formulation of business-level strategies under porter’s five forces model demands the following things to follow keenly.
- Advice 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, which is very essential for an organization.
- By using this strategy business gains cost advantages in the market.
- The management should think of making the products and services so innovative that have more importance to the customers.
This strategy is involved in the efforts of the development of products & services being unique in the organization.
- There may be differences in technology, brand image, features, quality, selection, and customer services.
- Cost is not of 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’s 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 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 into action by the managers.
- For the delivery of products and services by an organization, technology is widely used such as tools, techniques, equipment, machinery, 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 the 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.
- The 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 strategic control. It contains the critical environmental features which can affect the strategic plans. Organizational assessment of strategic actions and insurance of strategic plans is implemented as they were planned.
An Information system for the provision of feedback on the implementation and influence of strategic plans always works under the Strategic Control Systems.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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