STRATEGIC MANAGEMENT
5. STRATEGIC ANALYSIS (IN THE DYNAMICS OF
BUSINESS MANAGEMENT)
Strategic analysis is a fundamental element of strategic management that seeks to
understand the strategic position of the organisation in terms of its external
environment, its internal resources and competencies, and the expectations and
influences of stakeholders.
Therefore, the purpose of the analysis is to determine the characteristics of the
environment that the company faces, as well as its own capabilities and abilities, which
directly affect the determination of different strategic alternatives.
The strategic decisions, followed by the company, need to be based on an internal
analysis of the company and its environment since the strategies, in order to be
successful, must seek a balance between the environment, the organisational resources
and the values of the company.
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In order to carry out a successful analysis, we must take into account the following
aspects:
- Conflicting forces.
- Competition risk.
- Strategy formulation.
- Powerful buyers and suppliers.
- The competitive advantage.
Let us briefly describe each of these elements in order to know what we need to consider
in our strategic analysis.
● Competing forces
The most competitive forces determine the profits of an industry and therefore, are of
great importance in the formulation of strategies. For example, even a company with a
strong position in an industry without risks of potential competition will get low yields if
it is confronted with a superior substitute product or lower cost. In such a situation,
adapting or adjusting to the substitute product becomes the number one strategic
priority.
Some features are crucial to the strength of each competitive factor.
● Competition risk
The level of the competition risk depends on the present barriers and on the reaction of
existing competitors that the new participant can expect.
If the barriers to competition are high and a newcomer can expect an intense reaction
from entrenched competitors, it is obvious that there will be no significant entry risk.
New entrants bring new capabilities, the desire to gain market share and, often,
substantial resources into the industry.
There are six main sources of barriers to competition:
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- Economies of scale: By definition, economies of scale occur when a company
produces on a large scale, reducing production costs, as well as the final price of
the product. That is to say, it is producing more at a lower cost. The economies
of scale are known as increasing yields, which means that production is more
efficient when the scale is larger. In other words, they imply that when factors of
production are doubled, the production more than doubles. These economies
avoid competition, forcing the candidate, either to compete on a large scale or
to accept the cost disadvantage. Economies of scale can also act as an obstacle
to the distribution, use of the sales force, financing, and almost any other part of
a company.
- Differentiation of the product: Brand identification creates a barrier by forcing
new entrants to spend a lot on earning customer loyalty. Advertising, customer
service and product differences are among the factors that promote brand
identification.
- Capital requirements: The need for investing significant financial resources to be
able to compete creating an obstacle to entry, especially if capital is needed for
expenses on direct advertising or retail and distribution; and it will not be
recovered. Capital is necessary not only for permanent premises but also to give
credit to customers, inventories and to absorb losses associated with initiating
operations.
- Cost disadvantages regardless of size: Entrenched companies may have cost
advantages, which potential competitors do not have, regardless of their size and
feasible economies of scale.
- Access to distribution channels: The newcomers need to ensure the distribution
of their product or service. For example, a new food product needs to displace
other products on supermarket shelves through the reduction of prices,
promotions, intense sales efforts or other means. The more limited the
wholesale or retail channels are, the more difficult it will be to compete.
- Governmental policy: The government is able to limit or even avoid competition
in industries with controls such as the requirement of licences and limited access
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to raw material. The government can also play an indirect role in the
establishment of barriers to competition with control measures such as
standards for water and air pollution, and safety regulations.
● Strategy formulation
Once the corporate strategists have evaluated the forces affecting competition in their
industry as well as their root causes, strengths and weaknesses should be identified in
order to formulate a strategy.
The strategy can be considered an accumulation of defences against competitive forces
or a determination of positions in the industry where the forces are the weakest. The
knowledge about the capacity of the company and about the causes of the competitive
forces will help to highlight the areas where the company can face the competition and
those where it should avoid it.
● Powerful buyers and suppliers
Suppliers can exercise their bargaining power with participants in an industry by
increasing prices, or by reducing the quality of goods and services purchased.
The power of each major supplier or group of buyers depends on several characteristics
of their market situation and the relative importance of their sales or purchases from
the industry compared with their businesses globally.
● The competitive advantage
Companies achieve success in relation to their competitors if they have a sustainable
advantage. There are two basic types of competitive advantages: the comparative and
differentiation advantage.
The comparative advantage is the ability of a company to design, manufacture and
commercialise a comparable article more efficiently than its competitors, at the same
prices or similar to those offered by competitors.
The differentiation advantage is the ability to provide the buyer with a unique and
superior value in terms of special quality services, and aftersales service. The
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differentiation advantage permits a company to have a higher price, which gives it a
higher profitability.
- Development of competitive advantage
Different industries offer different competitive opportunities and, consequently,
successful strategies vary from industry to industry. The identification of strategies that
lead an industry to gain competitive advantages includes three major steps:
I. The definition of the industry: it involves defining the limits of the industry,
learning the rules of the game and identifying other players.
II. The identification of possible competitive actions or movements: competitive
movements exploit the possible sources of competitive advantages in the
industry. Its degree of effectiveness evolves with the life cycle of the industry
and is influenced by the movements of the other competitors.
III. The selection of generic strategies: the success of the management strategies
depends on the sequence of competitive movements. There are only a few
successful sequences that correspond to different industry situations.
5.1 GENERIC COMPETITIVE STRATEGIES
Taking into account the considerations regarding the elements that should be evaluated
in the strategic analysis, we will now take a look at the generic competitive strategies,
paying particular attention to two authors: Michael Porter and Henry Mintzberg.
5.1.1 Michael Porter
Michael Porter’s generic competitive strategies constitute a set of competitive
strategies so that they seek the general development of a company. They aim to
overcome the rivals in the industry. In some industrial sectors, the structure means that
all members can get high returns; while in others the success of a generic strategy is
hardly enough to achieve acceptable returns in an absolute sense.
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According to Porter, there are three generic strategies for companies: cost leadership,
differentiation and focus.
Let us now familiarise ourselves with these three strategies.
1. Cost leadership
The cost leadership strategy refers to the sale of products at the lowest unit price
available in the market through a reduction of production costs. This strategy could
involve offering products giving the best value for money (offering products of equal or
better quality than those of the competition but at a lower price), or simply offering
products at the lowest available price.
Through the application of this strategy, the main objective is to obtain a greater
participation in the market and, therefore, to boost sales while being able to reach the
point of taking competitors, who cannot cope, out of the market.
In order to reduce costs and, therefore implement this strategy you have to:
✓ Take advantage of the economies of scale.
✓ Produce items in a standardised manner.
✓ Produce in large volumes.
✓ Use raw material supplies efficiently.
✓ Simplify the design of the product.
✓ Take advantage of new technologies.
✓ Implement rigorous controls on costs and indirect expenses.
✓ Instil a culture of cost reduction in workers.
✓ Reduce costs in functions such as sales, marketing and advertising.
The cost leadership strategy is effective only in large markets, since in small markets it
would not bring large profit because the margins of profit per product, when using this
strategy, are generally small.
It is recommended to use this strategy in the following cases:
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✓ When the market is composed of consumers who are price sensitive.
✓ When there is little chance of achieving product differentiation.
✓ When consumers do not care much about differences between one brand and
another.
✓ When there are numerous consumers with a great capacity for negotiation.
The drawbacks of using this strategy are the risks of imitation by the competition and
that therefore, the profits in the market will decrease, and also that the interest of the
consumers will change towards other characteristics of the product apart from the price.
2. Differentiation
The differentiation strategy calls for creating unique and distinctive products that set
the company apart from the competition.
A company that employs this strategy may charge a premium for its product or service.
It can readily increase the prices due to the lack of substitute or alternative products on
the market.
Some examples of aspects or elements in which a company can establish a
differentiation strategy:
✓ Product design.
✓ Attributes or characteristics.
✓ Efficiency or performance.
✓ Quality.
✓ Brand.
✓ Providing good service or customer care.
✓ Personalized assistance.
✓ Fast delivery.
✓ Offering additional services.
The differentiation strategy is effective both in large and small markets, but only when
the differentiating aspects or characteristics of the product are difficult to imitate by the
competition.
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It is recommended to use this strategy in the following cases:
✓ When the market is composed of consumers indifferent to prices.
✓ When existing products do not meet the needs and preferences of consumers.
✓ When the needs and preferences of consumers are diverse.
✓ When the existing products differ little from each other.
The drawbacks of using this strategy are the risks that competition will quickly copy the
distinctive features of the product and steal away its customers and that the strategy
may backfire if consumers do not value the product enough.
A good example of differentiation could be when Apple released its first IPhone, a
product with a completely innovative design and a whole series of specific applications.
In the beginning, this new phone differed greatly from the phones that existed so far,
although, over time, other brands have released very similar models, which has led to
the disappearance of the initial differentiation strategy.
3. Focus
The idea behind the focus strategy is concentrating the company’s resources on a
specific segment of the market, i.e., focusing efforts on producing or selling products
that meet the needs and preferences of a particular group of consumers.
Through the implementation of this strategy, the company wants to develop expertise
in a reduced but well-defined market, and therefore, serve the designated group better
than anyone else there. The aim of this strategy is to be the go-to brand for the target
customers.
Some examples of the use of this strategy:
✓ Concentrating on a specific group of consumers.
✓ Focusing on a specific geographical market.
✓ Concentrating on a product line.
✓ Closing one or more divisions to focus on the one that has the best performance.
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Focus strategy is effective only in small markets since in large markets economies of
scale would favour companies that use cost leadership strategies, and when the chosen
market segment is large enough to be profitable and has good growth potential.
It is advisable to use this strategy in the following cases:
✓ When consumers have specific preferences or needs.
✓ When the competing companies have targeted the same market segment.
✓ When there are not enough resources to employ the cost leadership or
differentiation strategies.
The disadvantages of using this strategy are the risks that the competition may take over
the chosen market segment by deciding to target it as well, that a bad segmentation
might be carried out, and that the company will be missing out on the opportunity of
targeting other market segments.
As we have already seen the generic strategies of Porter, let us move to the strategies
addressed by Mintzberg.
5.1.2 Henry Mintzberg
Henry Mintzberg presents the most representative strategies and divides them into the
following groups:
1. Location of core business
One can conceive the existence of a business in connection with a network of industries
that, through the purchase and sale of raw materials among them, produce several
finished goods. The strategies for the location of the core business can be described in
relation to the stage in which the business is in the industry network and in the specific
industry. Companies have traditionally been classified into three major groups:
I. Primary (raw materials, extraction, conversion).
II. Secondary (manufacturing).
III. Tertiary (services).
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Different strategies can be identified:
▪ Upstream business strategy: these businesses operate near sources of raw
materials; production flow tends to be divergent, from a raw material to a variety
of uses of it. They tend to be strong industries when it comes to capital and
technology, leaning more toward obtaining profits through low costs, than by
high profit margins. An example of this type of businesses would be a company
located in the place from which raw materials are extracted, such as companies
dedicated to mining or companies that are engaged in cutting down trees and
the subsequent sale of firewood.
▪ Between streams business strategy: the organisation is located as in a neck of an
hourglass, and uses different materials for a single production process, from
which a product emerges, intended for different users. This type of business
refers to those manufacturing specific products, such as toys.
▪ Downstream business strategy: characterised by a great variety of materials that
converges in a narrow funnel. An example would be a large department store.
2. Differentiation of the core business
Once the core business is located, we have to expand it in order to make an analysis of
the characteristics of the organisation with the view to achieving competitive advantage
and remain in the marketplace.
The strategies of this differentiation are:
▪ Price differentiation strategy: applied in any way to every product that is not
differentiated, offering a lower cost than that of the competition.
▪ Image differentiation strategy: employed to make products, packaging or
consumption look different.
▪ Quality differentiation strategy: refers to the characteristics that make the
product we offer look better than competition’s in terms of quality.
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▪ Design differentiation strategy: enables offering something new that breaks with
the dominant design.
▪ The strategy of non-differentiation: when you do not intend or you do not have
the ability to differentiate.
3. Development of the core business
There are several generic strategies that are aimed at developing a business. They can
develop the range of products within the business already established, or develop its
market by adding new segments, new channels, or new geographical areas, or can
simply promote its products with greater rigour in the same market.
We differentiate the following strategies for the development of core businesses:
▪ Market entry strategy: the objective is to enter the market based on an increase
in participation.
▪ Market development strategy: refers to the extension of market segments.
▪ Geographic expansion strategy: is about bringing the products to new
geographical areas.
▪ Product development strategy. The need to distinguish between the following
strategies: the expansion of products, the proliferation of product lines and the
rationalization of a line of products.
4. Expansion of the core business
The goal is to take companies beyond their core business. To do this, we should make
use of the following modular business expansion strategies:
▪ Chain integration (upstream or downstream) strategy: the union either with
suppliers or buyers in the same operational chain or commercial activity.
▪ Diversification strategy: the access given to an existing business but not to the
same chain of operations.
▪ Input and control strategy: the chain of integration or diversification can be
achieved through internal development or acquisition. A company can access a
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new business; either by developing it or by buying it from another company that
is already in the industry.
▪ Combined integration-diversification strategy: combines the chain of integration
with the diversification of the business and it can result in the establishment of
new businesses.
▪ Withdrawal strategy: employed when enterprises suspend businesses that they
have undertaken.
5. Review of the core businesses
After a business has been already identified, distinguished, developed and extended,
usually it is not only necessary to consolidate it but also redefine it, reconfigure or even
reconsider it. We will achieve this through:
▪ Review strategies: they are used to redefine and recombine the business as well
as to carry out core relocation.
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