How Strategic Management Gives a Competitive Edge to the Practicing Organizations

HOW STRATEGIC MANAGEMENT GIVES A COMPETITIVE EDGE TO THE PRACTICING ORGANIZATIONS:

Strategic management is a broad subject which has been summarized in the area of competition, so as to give important and realistic collection of concepts, ideas and theories which are applicable in various organizations.

The entrepreneurial task of assessing whether and how a company’s present line-of-business strategy can be improved consists of a three-pronged diagnosis:

1. An examination of industry structure, industry direction and industry economics.

The foremost goal here is to gain a detailed understanding of what factors are operating to make the industry more or less attractive. This entails identifying and weighing: (a) the strategically relevant features of the industry’s structure; (b) where the industry is headed and the forces driving it in this direction; (c) the key factors for succeeding in the business, with emphasis on what central economic features of the industry shape how a firm makes money in this business; and (d) what strategic opportunities (specific) and threats confront the industry and must be contended with by all participants.

2. An analysis of competition and key competitors.

Here, the focus is on getting answers to three strategy- determining questions; (a) What competitive forces are at work in the industry and how do they combine to define how the game of competition is played in this particular industry? (b) What are the competitive positions and relative competitive strengths of key rivals (what are their strategies and how well are they working)? And (c) What moves can key competitors be expected to make next?

3. An assessment of the company’s own present business situation and competitive position.

The aim of this analytical piece is to size up (a) the firm’s internal strengths and weaknesses, (b) its external opportunities and threats, (c) the pluses and minuses in its competitive market position - whether the firm is gaining ground or losing out and why, (d) how well the present business and functional area strategies are working and why, and (e) any special strategic issues and problems unique to the enterprise.

The Concept of Driving Forces:

While developing a strategic profile of an industry’s current structure adds understanding, any such picture is only a static snapshot. Industries evolve and sometimes they take off in a dramatically different direction. Except in the rarest of cases, every industry is in a state of constant flux-forces of change are constantly at work and new ones are usually gathering steam nearby.

One popular hypothesis about how industries change is that they often go through observable evolutionary phases or life-cycle stages; the sequence of the stages usually proceeds from early development to rapid growth and takeoff to competitive shakeout and consolidation to early maturity to saturation to decline and decay.

Whether industries can be depended on to evolve neatly according to the life-cycle hypothesis debatable. Many do, but some do not. There are cases where industries have skipped maturity, passing from growth to decline very quickly.

Sometimes the paths of different industries collide, causing them to reform and merge as one industry ( as is now occurring among banks, savings and loan associations, and brokerage firms- all of which used to be in distinctly separate industries, but which are now reforming into a single financial services industry).

In addition, companies can influence the length of the growth phase through renewed product innovation. Because of these facets, the character of industry evolution is capable of varying from industry to industry; there doesn’t seem to be just one set pattern. Nothing in the life-cycle hypothesis permits reliable prediction as to when the “usual” cycle pattern will hold, when it will not, or how long the phases will last.

Hence, while it is worthwhile to be alert to signs as to where an industry might be in the cycle, it is more fruitful to search out what forces are driving the industry to change. Industries evolve because some forces are in motion that creates incentives or pressures for change. These can be called the industry’s driving forces. Driving forces work to push the current industry structure into a new structure and they usually create new kinds of competitive pressures - both of which have implication for business strategy.

The Kinds of Driving Forces and How They work:

There are numerous types of driving forces that are capable of producing evolutionary changes in an industry:

(i) Changes in the long-term industry growth rate.

The rate at which an industry is growing is a powerful force for structural and competitive changes. Projected market growth is a key variable in the investment decisions of firms to expand capacity and at least maintain market share. How fast a market is expected to grow shapes the balance between industry supply and buyer demand, and it affects the intensity of competition.

An industry’s long-term growth rate can change because of (1) Changing buyer demographics ( this is especially important in consumer goods industries), (2) Trends in the need for and usage of the industry’s products (rising property theft, for instance, has triggered increased demand for security alarms, safes, guards, and locks), (3) Lower prices and / or new availability of substitute and/ or complementary products, (4) A leveling off of demand owing to almost complete penetration of the new consumer market (sales and growth then become a function of replacement demand), and (5) Product innovation.

(ii) Changes in who buys the product and how they use it

Increases or decreases in the kinds of customers who purchase the product have potential for changing customer service requirements (credit, technical services, maintenance and repair), creating a need to alter distribution channels, and precipitating broader/narrower product lines, and different marketing practices.

The hand calculator industry became a different market requiring different strategies when students and households began to use them as well as engineers and scientists.

The computer industry was transformed by the surge of buyers for personal and human computers. The interest of some consumers in cordless telephones and mobile telephones for use in cars and trucks represents a major new buyer segment for telephone equipment manufacturers. Trying to ascertain the kinds of industry change to expect should, therefore, include an assessment of potential new buyer segments and their characteristics.

(iii) Product innovation

Product innovation can broaden the market, promote industry growth, and enhance product differentiation among rival sellers. When an industry is characterized by rapid product introduction, product innovation is sure to be a key driving force - one that not only shapes what the industry’s products are and will be but also impacts manufacturing methods, economies of scale, marketing costs and practices, and distribution.

Industries where product innovation has been a key driving force include copying equipment, cameras and photographic equipment, computers, electronic video games, toys, soft drinks( sugar-free and caffeine-free), beer (low calorie), and cigarettes (low-tar, low nicotine).

(iv) Process innovation

Frequent and important technological advances in manufacturing methods can likewise have a powerful impact on an industry. Rapid changes in manufacturing technology can dramatically alter unit costs, capital requirements, minimum efficient plant sizes, the desirability of vertical integration, and learning curve effects. All of these are capable of producing important changes in how large a firm needs to be and how many efficient- sized firms the market can support.

(v) Marketing innovation

The new ways that firms discover to market their products can sometimes revolutionize an industry. The use of a different advertising medium, introduction of new advertising themes, discovery of new points of difference among products that can be exploited, the use of new distribution channels can widen demand, increase product differentiation, and /or lower unit costs, thus setting in motion new forces to alter the industry and the strategies of participant firms.

(vi) Entry and exit of major firms

When an established firm from another industry enters a new market, it usually brings with it new ideas and perceptions about how its skills and resources can be innovatively applied. Hence the entry of a large and different type of firm can result in a “new ballgame” with new rules for competing and new key players.

Similarly, exit of a major firm changes industry structure by reducing the number of market leaders and perhaps increasing the dominance of the leaders who remain.

(vii) Diffusion of proprietary knowledge

As a technology becomes more established and knowledge about it spreads through the conduits of rival firms, suppliers, distributors, and customers, the advantage held by firms with proprietary technology erodes. This makes it easier for new competitors to spring up and, also, for suppliers or customers to integrate vertically into the industry.

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