Strategy Theories - Advanced

This post is more technical about the strategies models and theories.We will be analysing some strategy guru's theories like Michael Porter and Kenichi Ohmae. Introduction to Michael porter we have already done in the introduction. Kenichi is called "Mr. Stratgy". Kenichi will be discussed from the Introduction. We will be discussing some of the criticisms about Porter as well.

Michael Porter: Strategic theories

A leading contributor to strategic management theory^. Porter's main academic objectives focus on how a firm or a region can build a competitive advantage and develop competitive strategy. Porter's strategic system consists primarily of:

• 5 forces analysis
• strategic groups (also called strategic sets)
• the value chain
• the generic strategies of cost leadership, differentiation, and focus
• the market positioning strategies of variety based, needs based, and access based market positions.

5 Force analysis

Michael Porter describes five forces affecting the profitability of companies. These are the five forces he noted:

1. Intensity of rivalry amongst existing competitors
2. Threat of entry by new competitors
3. Pressure from substitute products
4. Bargaining power of buyers (customers)
5. Bargaining power of suppliers

These five forces, taken together, give us insight into a company's competitive position, and its profitability.

The Porter’s 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you’re looking to move into.

Four forces -- bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants:

• The bargaining power of customers
  • buyer concentration to firm concentration ratio
  • bargaining leverage
  • buyer volume
  • buyer switching costs relative to firm switching costs
  • buyer information availability
  • ability to backward integrate
  • availability of existing substitute products
  • buyer price sensitivity
  • price of total purchase
  
  
• The bargaining power of suppliers
  
  • supplier switching costs relative to firm switching costs
  • degree of differentiation of inputs
  • presence of substitute inputs
  • supplier concentration to firm concentration ratio
  • threat of forward integration by suppliers relative to the threat of backward integration by firms
  • cost of inputs relative to selling price of the product
  • importance of volume to supplier
• The threat of new entrants
  • the existence of barriers to entry
  • economies of product differences
  • brand equity
  • switching costs
  • capital requirements
  • access to distribution
  • absolute cost advantages
  • learning curve advantages
  • expected retaliation
  • government policies
• The threat of substitute products
  • buyer propensity to substitute
  • relative price performance of substitutes
  • buyer switching costs
  • perceived level of product differentiation
• The intensity of competitive rivalry
  • number of competitors
  • rate of industry growth
  • intermittent industry overcapacity
  • exit barriers
  • diversity of competitors
  • informational complexity and asymmetry
  • brand equity
  • fixed cost allocation per value added
  • level of advertising expense

Strategic Group

A strategic group is a concept used in strategic management that groups companies within an industry that have similar business models or similar combinations of strategies. For example, the fast-food industry can be portrayed as consisting of several strategic groups. The number of groups within an industry and their composition depends on what dimensions you use to define the groups. Strategists often use a two dimensional grid to display the position of each company along to the two most important dimensions.

Value Chain

The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales, and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, R&D, and procurement. The costs and value drivers are identified for each value activity. The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning. Its ultimate goal is to maximize value creation while minimizing costs. The concept has been extended beyond individual organizations. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will mobilize different economic actors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, the Empty vessel and the firm's buyers (and presumably extended to the buyers of their products, and so on).

Generic strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns.

A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:

Porter's Generic Strategies

Target Scope	Advantage
	Low Cost	Product Uniqueness
Broad (Industry Wide)	Cost Leadership Strategy	Differentiation Strategy
Narrow (Market Segment)	Focus Strategy (low cost)	Focus Strategy (differentiation)

Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a given level of quality.

Differentiation Strategy

A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition.

Focus Strategy

The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation.

A Combination of Generic Strategies

Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.

Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces.

Generic Strategies and Industry Forces

Industry Force	Generic Strategies
	Cost Leadership	Differentiation	Focus
Entry Barriers	Ability to cut price in retaliation deters potential entrants.	Customer loyalty can discourage potential entrants.	Focusing develops core competencies that can act as an entry barrier.
Buyer Power	Ability to offer lower price to powerful buyers.	Large buyers have less power to negotiate because of few close alternatives.	Large buyers have less power to negotiate because of few alternatives.
Supplier Power	Better insulated from powerful suppliers.	Better able to pass on supplier price increases to customers.	Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.
Threat of Substitutes	Can use low price to defend against substitutes.	Customer's become attached to differentiating attributes, reducing threat of substitutes.	Specialized products & core competency protect against substitutes.
Rivalry	Better able to compete on price.	Brand loyalty to keep customers from rivals.	Rivals cannot meet differentiation-focused customer needs.

Kenichi Ohmae strategy model

Kenichi Ohmae (born February 21, 1943) is one of the world's leading business and corporate strategists. He is known as 'Mr strategy' and has developed the 3C's model.[ Kenichi formulated the 3C's model (three C's framework) . He stresses that a strategist should focus on three key factors for success. "In the construction of any business strategy, three main players must be taken into account:

• the corporation itself,

• the customer, and

• the competition".

Only by integrating the three C's (Customer, Competitor, and Company) in a strategic triangle, sustained competitive advantage can exist. He refers to these key factors as the three C's or the strategic triangle.

3C's model: Customer-based strategies are the basis of all strategy. ..."There is no doubt that a corporation's foremost concern ought to be the interest of its customers rather than that of its stockholders and other parties. In the long run, the corporation that is genuinely interested in its customers is the one that will be interesting to investors".

Segmenting by objectives:
Here, the differentiation is done in terms of the different ways different customers use the product. Take coffee, for example. Some people drink it to wakeup or keep alert, while others view coffee as a way to relax or socialize (coffee breaks).

Segmenting by customer coverage:
This type of strategic segmentation normally emerges from a trade-off study of marketing costs versus market coverage. There appears always to be a point of diminishing returns in the cost-versus-coverage relationship. The corporation's task, therefore, is to optimize its range of market coverage, be it geographical or channel, so that its cost of marketing will be advantageous relative to the competition.

Resegmenting the market:
In a fiercely competitive market, the corporation and its head-on competitors are likely to be dissecting the market in similar ways. Over an extended period of time, therefore the effectiveness of a given initial strategic segmentation will tend to decline. In such a situation it often pays to pick a small group of key customers and reexamine what it is that they are really looking for.

Changes in customer mix:
Such a market segment change occurs where the forces at work are altering the distribution of the user-mix over time by influencing demography, distribution channels, customer size, etc. This kind of change calls for shifting the allocation of corporate resources and/or changing the absolute level of resources committed in the business, failing which severe losses in the market share can occur.

3C's framework: Corporate-based strategies. They aim to maximize the corporation's strengths relative to the competition in the functional areas that are critical to success in the industry.

Selectivity and sequencing:
In order to win the corporation does not need to have a clear lead in every function from sourcing to functioning. If it can gain a decisive edge in one key function, it will eventually be able to pull ahead of the competition in other functions that may now be no better than mediocre.

A case of make or buy:
In case of rapidly rising wage costs, it becomes a critical decision for a company to subcontract a major share of its assembly operations. Its competitors may not be able to shift production so rapidly to subcontractors and vendors, and the resulting difference in cost structure and/or in the company's ability to cope with demand fluctuations could have have significant strategic implications.

Improving cost-effectiveness:

This can be done in three basic methods. The first is by reducing basic costs much more effectively than the competition. The second method is simply to exercise greater selectivity in terms of orders accepted, product offered, or functions to be performed which means cherry-picking the high-impact operations so that as others are eliminated, functional costs will drop faster than sales revenues. The third method is to share a certain key function among the corporation's other businesses or even with other companies. Experience indicates that there are many situations in which sharing resources in one or more basic sub-functions of marketing can be advantageous.

3 C's model: Competitor-based strategies

according to Kenichi Ohmae can be constructed by looking at possible sources of differentiation in functions ranging from purchasing, design, and engineering to sales and servicing.

The power of an image:
Both Sony and Honda outsell their competitors as they invested more heavily in public relations and promotion and managed these functions more carefully than did their competitors. When product performance and mode of distribution are very difficult to differentiate, image may be the only source of positive differentiation. But as the case of the Swiss watch industry reminds us, a strategy built on image can be risky and must be monitored constantly.

Capitalizing on profit- and cost-structure differences:
Firstly, the difference in source of profit might be exploited, for e.g. profit from new product sales, profit from services etc. Secondly, a difference in the ratio of fixed cost to variable cost might also be exploited strategically for e.g. a company with a lower fixed cost ratio can lower prices in a sluggish market and win market share. This hurts the company with a higher fixed cost ratio as the market price is too low to justify its high-fixed-cost-low-volume operation.

Tactics for flyweights:
If such a company chooses to compete in mass-media advertising or massive R&D efforts, the additional fixed costs will absorb such a large portion of its revenue that its giant competitors will inevitably win. It could though calculate its incentives on a graduated percentage basis rather than on absolute volume, thus making the incentives variable by guaranteeing the dealer a larger percentage of each extra unit sold. The Big Three, of course, cannot afford to offer such high percentages across the board to their respective franchised stores; their profitability would soon be eroded if they did.

Hito-Kane-Mono

A favorite phrase of Japanese business planners is hito-kane-mono, or people, money, and things (fixed assets). They believe that streamlined corporate management is achieved when these three critical resources are in balance without any superfluity or waste. For example cash over and beyond what competent people can intelligently expend is wasted. Again too many managers without enough money will exhaust their energies and involve their colleagues in time-wasting paper warfare over the allocation of the limited funds. Of the three critical resources, funds should be allocated last. Based on the available mono-plant, machinery, technology, process know-how, functional strengths and so on-the corporation should first allocate management talent. Once these hito have developed creative, imaginative ideas to capture the business's upward potential, the kane, or money, should be allocated to the specific ideas and programs generated by individual managers.

Criticism

Michael Porter

Porter's framework has repeatedly been challenged by other academics and strategists. Kevin P. Coyne and Somu Subramaniam have stated that three dubious assumptions underlie the five forces:

• That buyers, competitors, and suppliers are unrelated and do not interact and collude
• That the source of value is structural advantage (creating barriers to entry)
• That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior.