INTRODUCTION

Strategy management- a tool for competitve advantage

In the context of improved business performance traditional mangement

circles used to concentrate on the profit figures displayed by the books of
accounts. It has been since the late 1960’s that organisations shifted focus
to the way business is conducted. Management circles gradually began to
realise that the tactical operations of a firm can be the most effective tool
in creating competitive advantage.

Strategic management is the process of specifying an organization's

objectives, developing policies and plans to achieve these objectives, and
allocating resources so as to implement the plans. Strategy is often the
highest level of managerial activity, usually performed by the company's
Chief Executive Officer (CEO) and executive team. It provides overall
direction to the whole enterprise. An organization’s strategy must be
appropriate for its resources, circumstances, and objectives. (Miller,
1998)

In simple terms the startegy involves matching the companies' strategic

advantages to the business environment the organization operates in. the
process involves enabling the firm to place itself in a position where it
can stay ahead of the competition and interact with the market forces.
Some of the older management circles used to use economic value as the
sole performance indicator. The major portion of mangement activities
were centred around directives driven by the sole need for increased
profit figures.

The latest concept is to gain a competitive advantage over the

competiton.
Besanko et al (1996) defines competitve advantage as the ability of the
firm to outperform its industry and for a firm to achieve a competitve
advantage it must create more value than its competitiors. The creation of
competitive advantage requires that the resource and resource allocation
within the the firm be tied into unison with the industry charateristics.
Many firms adopt the strategy of product differentiaiton as part of their
strategic positioning.

The core part of this thesis is how and why an organisations capabilities
should be matched to the industry it operates in.
Strategy policies and the external environment

E. Chaffee (1985) summarized what he thought were the main elements

of strategic management theory by the 1970s. They are:

• Strategic management involves adapting the organization to its

business environment.
• Strategic management is fluid and complex. Change creates novel
combinations of circumstances requiring unstructured non-
repetitive responses.
• Strategic management affects the entire organization by providing
direction.
• Strategic management involves both strategy formation (he called
it content) and strategy implementation (he called it process).
• Strategic management is partially planned and partially unplanned.
• Strategic management is done at several levels: overall corporate
strategy, and individual business strategies.
• Strategic management involves both conceptual and analytical
thought processes.

(http://strategic-management.ask.dyndns.dk/)

Chaffee argues that despite internal competencies the external

environment is the main driver of changes. Chaffee opines that strategic
policies should be centred on those external forces, which immediately
affect the business environment the organisation operates in. The most
characteristic feature of today’s business environment is obviously
‘change’. The best strategy policy would take into account how change
can be dealt with or better yet anticipated.

However, to formulate and implement effective strategy the first step is to

analyse the environment from all the relevant perspectives. At the least,
the external factors would be the following: -

• Competitive firms
• Government regulations
• Changing consumption trends
• Changes in manufacturing technologies
• Changes in internet technology
• Changes in the social perceptions of the public
The list above is in no way all-inclusive and there are many other
variables, which contribute to the external environment.

The prudent strategic decision would be to analyse and study the

environment before the formulation of the strategic plan. The example of
Federal Express aptly explains this concept. Federal Express developed a
new form of competitive advantage when it formed its own strategic
position. The company studied the market and realised that quick and
reliable delivery service was something that would catch on quickly in
the business as well as domestic parcel delivery sector. Judge et al 1991
termed this form of competitive advantage ‘quick response’. Federal
express thus became the pioneer of overnight package delivery.

Different organizations have different and unique experiences when it

comes to strategic management. The decision making in each case
reflects the organization's distinct work culture, environment, resources,
structure, management style, and other internal features. Regardless of
industry matching the strategy to the external environment is the key task,
which enables greater levels of success.

Strategy management begins with strategy planning. Strategic planning

marks the transition from operational planning to choosing a direction for
the organisation. Organisations that use a strategic planning model do so
because they are sensitive to volatility in the external environment. With
strategic planning, the planning focus goes beyond forecasting population
shifts and concentrates on understanding changing stakeholder needs,
technological developments, competitive position, and competitor
initiatives. Decisions, then, are better attuned to the external world.
Managers use strategic planning as a management function to allocate
resources to programmed activities calculated to achieve a set of goals in
a dynamic, competitive environment. (Morrison et al 1996)

Studying the external environment

The external environment of any business environment comprise of

social, technological, economic, environmental, and political trends and
developments and even natural forces to some extent.

The concept of strategic management underlies that plans must be made

on the basis of what has, is, and will happen in the world outside the
organization with a focus on the threats and opportunities these external
changes present to the organization. There are two major reasons for
beginning with an external analysis. First, this analysis will have
implications for organizational change and development. Second, by
having leaders from all functional areas of the organization involved in
the analysis, it should be easier to obtain their cooperation in making
adjustments in response to the external analysis. (Morrison et al 1996)

To study the external environment there are different tools. Each of these
tools analyse different aspects of the business environment from within
both the organisation and the external environment. The most popular
tools are the SWOT and the PEST analysis and Five forces model.

Porters 5 Forces Models

Michael Porter described a concept that has become known as the "five
forces model".

Strategy must fit the environment in which the company operates, or the
company must be able to reshape this environment to its advantage
through its choice of strategy. Companies typically fail when their
strategy no longer fits the environment in which they operate.

The main technique used to analyse competition in the industry

environment is the ‘five forces model’.

The five forces are: -

(1) The risk of new entry by potential competitors,

(2) The extent of rivalry among established firms,
(3) The bargaining power of buyers,
(4) The bargaining power of suppliers, and
(5) The threat of substitute products. (Hill et al 2001)

1.The risk of entry by potential competitors is a function of the height

of barriers to entry. The higher the barriers to entry, the lower is the risk
of entry and the greater are the profits that can be earned in the industry.
(Hill et al 2001) An organisation should look at how loyal customers
view existing products, how quickly they can achieve economy of scales,
would they have access to new suppliers and very importantly the level of
government legislation, which may prevent them or encourage them to
enter the industry.
2.The extent of rivalry among established companies is a function of
an industry's competitive structure, demand conditions, and barriers to
exit. Strong demand conditions moderate the competition among
established companies and create opportunities for expansion. When
demand is weak, intensive competition can develop, particularly in
consolidated industries with high exit barriers. (Hill et al 2001)

Generally competitive rivalry will be high if:

• There is little differentiation between the products offered from the

competing firms
• Competitors have approximately the same operations size between
them.
• If the competitors all have similar market and advertising strategies.
• If the exit barriers are costly, that is, it is costly to leave the industry
hence they stay on and compete.

3.Buyers are most powerful when a company depends on them for

business, but they themselves are not dependent on the company. In such
circumstances, buyers are a threat. (Hill et al 2001) Customer sensitivity
to price is a critical factor to look out for when formulating strategy. New
entrant or competing rivals will often adopt strategies, which involve
price discounts and other promotional offers.

4.Suppliers are most powerful when a company depends on them for

business but they themselves are not dependent on the company. In such
circumstances, suppliers are a threat. (Hill et al 2001)

Reliable supply of quality raw materials is needed to ensure uninterrupted

production lines for any organisation. The role of the supplier comes
from the following points: -
• If they are the only supplier or one of few suppliers within a
geographical location who can supply that particular raw material.
• Where it is costly for the organisation to switch from one supplier to
another.
• Where there is no other substitute for the particular raw product.
5.Substitute products are the products of companies serving consumer
needs that are similar to the needs served by the industry being analysed.
The greater the similarity of the substitute products, the lower is the price
that companies can charge without losing customers to the substitutes.
(Hill et al 2001)

The threat of substitute products is important when planning strategy

because: -

• Price of that substitute product is cheaper in comparison without

significant reduction in purposefulness
• It is easy for consumers to switch from one substitute product to
another.
• Buyers are willing to substitute on regard of cost value analysis or just
convenience

The five forces model encompasses almost every aspect of the external
environment to the fullest. The model helps the management to recognise
the individual aspect that exert force on the firms position within the
industry. However, the five forces model has a major drawback. The
model presents a static picture of competition that de-emphasizes the role
of innovation. Innovation can revolutionize industry structure and
completely change the strength of different competitive forces. (Hill et al
2001)

SWOT Analysis

Another popular model that helps to match the organisation capability to

the external environment is the tool called the SWOT Analysis. This tool
basically uses four characteristics of n organisation from both within the
internal working and external spectrum. Each of the letters in the name
SWOT represents these characteristics.

Strengths
Every organization is strong in some particular point. Sometimes it might
be dominant market shares. In other cases, it is a matter of perspective,
for instance, a company is very small and hence has the ability to move
fast even strong marketing staff can form a major strength. It is important
to note that companies that are in a relatively poor position also have
certain strengths and can add up to the competition. Whether these
strengths are adequate is an issue, which requires further close scrutiny.

Weaknesses
strength is also accompanied by certain weakness. In some cases, this
might be in the form of a stricter regulatory environment. In other cases
firms may have a low entry barrier thereby opening venues of attack form
new competition. It is important to note that companies that are extremely
competent in operations can also have weaknesses. How badly these
weaknesses will affect the company is a matter of analysis.

Opportunities
All organizations have some opportunities. These could range from
expansion or even diversification of scale of operations. Realising and
making use of these new opportunities is the mark of an efficient
strategist.

Threats
Every industry ahs inherent threats. These could be internal, such as
labour problems, government regulations, managerial politics etc. They
could be external, such as increased competition, government regulation
etc.

Here are some examples of what a SWOT analysis can be used to assess:

• a company (its position in the market, commercial viability, etc)

• a method of sales distribution
• a product or brand
• a business idea
• a strategic option, such as entering a new market or launching a
new product
• a opportunity to make an acquisition
• a potential partnership
• changing a supplier
• outsourcing a service, activity or resource
• an investment opportunity
(http://www.businessballs.com/swotanalysisfreetemplate.htm

PEST Analysis

PEST analysis looks at the external business environment. It is one of the

most popular forms of analysis a business environmental analysis. PEST
stands for Political, Economic, Sociocultural and Technological. The
analysis examines the impact of each of these factors (and their interplay
with each other) on the business. The results can then be used to take
advantage of opportunities and to make contingency plans for threats
when preparing business and strategic plans. The PEST analysis breaks
down each point into three segments namely issues, challenges and action
areas. The issues segment addresses the key problem the organisation
faces from the external environment. The challenge part of the analysis
details what the firm should prioritise in order to face up to the issues.
The action areas specifically lay down suggestion and alternatives to the
issues and challenges.

Political environment

When looking at political factors the strategist should consider the impact
of any political or legislative changes that could affect the business. If the
firm is operating in more than one country then a look at each country in
turn is necessary. Political factors include aspects such as laws on
maternity rights, data protection and even environmental policy: these
three examples alone have an on impact employment terms, information
access, product specification and business processes in many businesses
globally.
(http://www.marketingintelligence.co.uk/help/Q&A/question14.htm)

Economic environment

All organisations are directly or indirectly affected by economical factors

both nationally and globally. Interest rate policy and fiscal policy will
have to be set accordingly. The state of the economy is a vital
consideration before making strategy decisions. Whether an economy is
in a boom, recession or recovery will also affect consumer confidence
and behaviour. The tax levels, per capita income, buying power of the
public are all important considerations. (Hill et al 2001)

Sociocultural factors

These elements build society. Social factors influence people's choices

and include societal beliefs, values and attitudes. So understanding
changes in this area can be crucial, as they lead to political and societal
change.
(http://www.marketingintelligence.co.uk/help/Q&A/question14.htm)

Technological factors

Changes in technology are changing the way business operates. The

Internet is having a profound impact on the marketing mix strategy of
organisations. Consumers can now shop 24 hours a day comfortably from
their homes. The challenge these organisation faces is to ensure that they
can deliver on their promise. Those businesses, which are slow to react,
will fall at the first few hurdles. This technological revolution means a
faster exchange of information beneficial for businesses as they can react
quickly to changes within their operating environment. There is renewed
interest by many governments to encourage investment in research and
development and develop technology that will give their country the
competitive edge. The pace of technological change is so fast that in the
computer industry the average life of a computer chip is approximately 6
months. In the name of progression technology will continue to evolve
organisations that continue to ignore this will face extinction.
(http://www.learnmarketing.net/environment.htm)

Differences between PEST and SWOT

Although the two tools seem similar in approach and content, there is a
line of difference between them. The practicality of each tool depends
entirely on the situation to be appraised. The following are the key
differences: -

(adaptedfromhttp://www.businessballs.com/swotanalysisfreetemplate.htm

1.PEST is useful before SWOT, not generally vice-versa. PEST definitely

helps to identify SWOT factors.

PEST assesses a market, including competitors, from the standpoint of a

particular proposition or a business.

SWOT is an assessment of a business or a proposition.

2.PEST becomes more useful and relevant the larger and more complex
the business or proposition, but even for a very small local businesses a
PEST analysis can still throw up one or two very significant issues that
might otherwise be missed.

The four quadrants in PEST vary in significance depending on the type of

business, eg., social factors are more obviously relevant to consumer
businesses or a B2B business close to the consumer-end of the supply
chain, whereas political factors are more obviously relevant to a global
munitions supplier or aerosol propellant manufacturer.
(http://www.businessballs.com/swotanalysisfreetemplate.htm)
All businesses benefit from a SWOT analysis, and all businesses benefit
from completing a SWOT analysis of their main competitors, which
interestingly can then provide some feed back into the economic aspects
of the PEST analysis.
(http://www.businessballs.com/swotanalysisfreetemplate.htm)

CONCLUSION

Strategy management has diversified since its advent in the late 1950s.
Today it as complex as the business environment it has provide answers
for. This study has discussed three of the most popular tools used when
formulating strategy. Each of the three models has their own utilities as
well as drawbacks. While the five forces model is strong in assessing
every factor in the external environment, it does not address the factor of
change adequately. The PEST and SWOT models have to applied with
respect to the individual business or the industry in which the
organisation operates. Nevertheless, the creation of so many models for
use in the strategy management process clearly emphasises the
importance of tying the internal competencies of the organisation tot the
external environment.