Video - Overview of lesson
‘In real life, strategy is actually very straightforward. You pick a general direction and implement like hell.’ – Jack Welch, Winning
(Jack Welch is an American business executive, author and chemical engineer. He was chairman and CEO of General Electric between 1981 and 2001.)
“Strategy is the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.” (Chandler, A.D., Strategy and Structure)
Strategic planning is an organisation’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.
Internal and External Alignment
- Businesses must seek to align their internal capabilities and resourcing with external opportunities, threats and demands.
- Businesses have no control over the external environment and must be constantly vigilant to changes in it.
- Objectives, strategy and tactics may be formulated by aligning these external and internal environments.
There are various tools that help organisations to analyse:
- The competitive landscape.
- The external environment in which they operate.
- Their internal capabilities, strengths and weaknesses.
- Opportunities and threats.
We look at some of these tools in the following sections.
External Analysis – Porter’s Five Forces
Prior to determining its strategy, an organisation needs to understand the competitive forces that operate in the sector in which it wishes to compete.
Threat of entry of competitors:
- Organisations need to know how easy it will be for other organisations to set up in competition.
- In commodity industries there are often low barriers to entry and organisations will need to consider how they will distinguish themselves.
- For example, selling greetings cards will have low barriers to entry; setting up in the energy sector will be more challenging.
Bargaining power of suppliers:
- Suppliers can have considerable bargaining power in situations where the number of suppliers is low and customers have limited options to go elsewhere.
- Suppliers holding desirable patents similarly have a lot of power. Such suppliers can control prices and conditions. Consider, for example, the energy supply companies or the makers of smartphones or suppliers of mobile networks.
Bargaining power of customers:
- Where there are many suppliers, e.g. for commodity products, customers can shop around.
- This makes it difficult for suppliers to control prices; price wars may be a feature of such situations.
Threat of substitute products:
- This describes a situation where the products that an organisation sells can easily be substituted with something else.
- In the pharmaceutical industry, cheaper, generic, drugs may be substituted for more expensive originals after a certain period has elapsed. Supermarkets substitute their own brands for the more expensive brands.
- The middle box represents the overall competitive environment in a particular market sector.
- Consider, for example, the competitive position in the software or mobile phone industries.
External Analysis – PESTLE
The PESTLE technique identifies factors in the external environment that may impact an organisation.
The factors included in PESTLE are:
- Political: Originating from government policies.
- Economic: Relating to the state of the economy.
- Social: Derived from the needs of the market and the customers.
- Technological: Concerned with developments in technology, including, but not limited to, information technology.
- Legal: Derived from laws and regulations.
- Environmental: Derived from concerns about the natural environment.
These factors will, at various times, affect all organisations.
Organisations must ensure that they are continually aligned with such external factors and in some circumstances may need to amend their current strategy.
- Supporting technical innovation.
- Initiatives to improve the population’s health and welfare.
- Employment opportunities.
- Initiatives to tackle homelessness.
- Money supply.
- Prevailing interest rates.
- Currency exchange rates.
- Competitor pricing.
- Interest in particular activities, e.g. fitness activities.
- Interest by retired people in taking cruises.
- What’s trending with teenagers.
- Developments in degradable plastics.
- Nano technologies.
- Development of ideas inspired by observing animal behaviour.
- Gender discrimination.
- Health and safety.
- Use of diesel in vehicles.
- Concern about the rain forests.
The factors can be derived by having workshops to brainstorm.
Many factors could be categorised under more than one heading. For example, waste disposal might come under:
The categories are used more to drive out ideas than for filing of ideas.
Internal Analysis – Resource Audit
The resource audit is an internal analysis technique that identifies what an organisation currently has, physically, financially and intellectually. It also identifies more abstract properties that an organisation can be said to posses.
The technique supports analysis of key areas of internal capability in order to identify resources that will enable business change (Strengths) and aspects that may work against change (Weaknesses).
The audit comprises 5 categories.
- Assesses an organisation’s financial position and stability, be they strong or weak.
- The financial position affects an organisation’s ability to invest in good times and to survive market downturns.
- The financial position can consider historic results, forward projections, cash flows and liquidity.
- Things that an organisation owns such as land and equipment.
- These things may have high value and be modern and efficient.
- Alternatively, they may low value, old, inefficient and expensive to run, prone to breakdown and incurring high maintenance costs.
- The human resources employed, their skills, attitude, flexibility and commitment.
- The reputation of an organisation in the market place
- The extent of brand recognition and the perception of that brand.
- Includes the patents and trademarks.
- Also includes the use made of resources such as information and technology.
- For example, is the information current and correct, easy to access and interpret?
Internal Analysis – MOST
Mission: The mission statement should summarise exactly what business the organisation is in, its products, the market segment it intends to focus on and its attitude towards both customers and employees. Accenture’s mission statement, for example, is ‘To become one of the world’s leading companies, bringing innovations to improve the way the world works and lives’.
Objectives: state what the organisation intends to achieve within a given time period in order to achieve its mission. Objectives should be SMART, i.e.
- Time framed.
- Increase profit within a given time period, e.g. Increase profit by 10% within 2 years.
- Decrease costs within a given time period, e.g. Reduce costs by £1 million within 1 year.
Strategy: demonstrates the approach that will be taken to achieve the objectives and ultimately the mission and vision. There will always be a range of strategic options to achieve an objective.
Tactics: explain the detail of how to implement the strategy. There will usually be many possible tactics for achieving a strategy. A tactic implies that something specific will change, e.g. the organisation may
- Do something new.
- Do something in a different way.
- Stop doing something.
The organisation should consider its MOST in the light of the external environment that it has identified and the analysis of its strengths and weaknesses – is the MOST realistic?
Many organisations use VMOST which has Vision as the first section, a higher level than Mission. Vision identifies the broad direction in which the organisation intends to go and where it sees itself in the future.
Internal Analysis – Boston Box
Strategic business units in an organisation will have a mix of products. This is referred to as their portfolio.
All products in a portfolio will have a life cycle in the market, from initial launch to eventual obsolescence.
The Boston Consulting Group (BCG) identified four stages in the life-cycle of a successful product.
They associated each stage with a particular rate of growth and a relative market share.
This can be depicted graphically in what is known as the Boston Box.
From start to finish the names of the stages in the Boston box are:
- Wild cat or problem child.
- Cash cow.
We’ll look at each of these in turn.
Wildcat or Problem Child
A successful product launch will see the product start with a high rate of growth in the market.
However, it’s relative market share will initially be low.
Wildcats need to at least recover the investment that was put into their development.
Organisations spend money on promoting these products.
The promotions are carefully analysed to assess their effectiveness.
The hope is of course that wildcats become stars.
Stars have a high rate of growth combined with a high relative market share.
They are the high profit earners.
A star’s rate of growth will gradually decline while its market share remains high.
At this stage they’re known as cash cows and are milked for their money.
This money can be invested in the stars and in the development of new products.
If a cash cow’s rate of growth and relative market share continue to decline they eventually become dogs.
Dogs may go into terminal decline or be sold to another organisation that can find a place for them in their portfolio.
Combining External and Internal Influences – SWOT
SWOT stands for
- Strengths and weaknesses come from the organisation itself.
- Threats and opportunities come from outside.
It is useful to obtain the customer perspective for objectivity when considering strengths.
There is a dynamic relationship between the external and internal perspectives in that strengths can be used to exploit opportunities.
SWOT analysis involves the same basic steps and is likely to produce similar results.
The order in which managers think about strengths, weaknesses, threats and opportunities may, however, have an impact on the direction of the analysis:
- Focusing on threats and opportunities first helps lead to productive discussions about what is going on in the external environment rather than getting bogged down in possibly abstract discussions about what a company is good at or bad at.
- Having identified the external opportunities and threats, an organisation can consider how well it is set up to do something about them.
- Focusing internal capabilities first allows the organisation to identify what they good at and then look for opportunities that exist in the market place. They may also become aware of threats that perhaps threaten their existence, e.g. if their current strengths are becoming irrelevant, perhaps by advances in technology.