MGTS1301 Module Week 7

Strategic Management
Competitive Management
Organisations are made up of resources and capabilities. Resources include financial assets,
equipment, infrastructure and skilled employees that organisations can acquire with money.
Capabilities are routines, processes and culture that organisations develop over time.

The concept of a competitive advantage is central to understanding an organisation’s

strategy.
 Competitive advantage arises when an organisation develops or acquires a resource
or capability that allows it to outperform its competitors
 It is an organisation’s unique resources and capabilities, known as core
competencies, which form the basis of competitive advantage.

Some examples of competitive advantage include:

 Exclusive access to natural resources
- E.g. a resources company may apply to the government for a mining lease to gain
exclusive access to mine natural resources such as coal, iron ore or bauxite
 A highly recognisable and respected brand
- E.g. consumers trust organisations such as Lego, Adidas, Netflix and Google to
produce high quality products and services
- Brands are likely to remain respected when they are perceived as authentic and
engage in ethical conduct
 Access to customer data
- E.g. Technology company, Alibaba uses data about customer’s previous
purchases as well as geo-location data to provide better customer experiences,
drive sales and make decisions about how to expand their business
 Access to highly skilled employees
- E.g. employees at Ritz-Carlton luxury hotels are selected and trained to
communicate with customers in a way that delivers exceptional service
 Access to or ownership over a new technology, especially when it is protected
legally by patents and copyright
- E.g. Nespresso had more than 1700 patents related to its coffee capsules and
machines. This dramatically limited the ability of competitors to enter the coffee
capsule market until their patents started expiring in the early 2010s

The Strategic Management Process

 During the strategic management process, managers develop a good understanding
of both the internal capabilities and resources in their organisation as well as the
external environment
 This allows managers to identify and exploit their organisation’s competitive
advantage.

1. Managers begin the strategic management process by evaluating how successful they
have been at meeting their existing mission, goals and strategies (closely related to the
first function of management: planning)
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 A mission is the organisation’s reason for existence. A well-defined mission is the

basis for the organisation’s goals and plans. This is usually captured in a mission
statement.
 Goals are broad statements that describe where the organisation as a whole wants
to be in the future.
 Strategy is the plan of action that describes resource allocation and activities to
achieve strategic goals. An aim of strategy is to give the organisation a competitive
advantage in order to achieve its goals.

2. Managers analyse the internal and external environment to understand the factors that
will affect the organisation’s ability to compete.

3. Managers revise their mission, objectives and strategies and define how these will apply
at each level in their organisation (i.e. the corporate, business and functional level).

4. Finally, managers implement the new strategies by making relevant changes to

leadership and culture, organisational structure, human resources and control systems.
- Strategy implementation is closely related to the management functions of
leading, organising (structure) and controlling.

Analysing the External and Internal Environment (Second step)

The second stage involves analysing the organisation’s external and internal environments
using a SWOT analysis and a VRIO analysis.

SWOT Analysis
 Strengths are positive internal characteristics an organisation can use to achieve its
strategic goals. Strengths are analysed by looking at internal information such as
financial reports and employee surveys.
 Weaknesses are negative internal characteristics that may restrict the organisation’s
ability to achieve goals. Weaknesses are analysed by looking at internal information
such as financial reports and employee surveys.
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 Opportunities are characteristics of the external environment that may help an

organisation achieve its strategic goals. Opportunities are analysed by looking at the
external environment, such as through a competitor analysis or customer survey.
 Threats are characteristics of the external environment that may prevent the
organisation from achieving its goals. Threats are analysed by looking at the external
environment, such as through a competitor analysis or customer survey.

VRIO Analysis
 Jay Barney developed the VRIO framework to help managers identify resources and
capabilities that can form an organisation’s competitive advantage
 To complete a VRIO analysis, managers ask questions about the value, rarity, and
imitability of their organisation’s existing resources and capabilities
 Also assess whether the organisation is organised in such a way as to exploit the
resources and capabilities.

During a VRIO analysis a manager will ask:

1. Valuable: Does this resources or
capability meet customer needs or
allow us to exploit opportunities or
mitigate threats?
2. Rare: Do only a few (if any) of our
competitors have access to this
resource or capability?
3. Imitable: Are these resources or
capabilities difficult to imitate
because they are physically unique,
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linked to specific historical circumstances, linked to interpersonal relationships or

difficult for others to identify?
4. Organised: Does our organisation have the right structure, culture, employees,
control system and reward system to make the most of capabilities and resources?
Selecting New Strategies at the Business Level (Third Step)
The third step involves revising the mission and objectives and selecting new strategies.
Managers select strategies that are relevant to three levels of an organisation: corporate
level, the business level and the functional level.

 At the corporate level the main question is “what business are we in?” A corporate-
level strategy pertains to the organisation as a whole, including all business units and
product lines.
 At the business level, the focus is on formulating strategy relevant to a particular
product line or business unit. The main question is “how can we compete for
customers in an industry?”
 At the functional level managers focus on implementing the business-level strategy.

Although the corporate level is above the business level, it makes sense to consider the
business level strategy first.

Porter’s Five Forces

 Michael Porter developed a model to help managers determine the overall
attractiveness of an industry in which they are competing or plan to compete.
Examples of industries include:
 The financial industry (insurance companies, investment banks, trading banks),
 The healthcare industry (biotechnology companies, pharmaceutical companies,
medical practices, pathology operators), and
 The food and beverage manufacturing industry (meat and meat products, beverage
and malt manufacturing, fruit and vegetable processing).
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Figure 5.7 explains Porter’s Five Forces model. Each box is a competitive force in the
organisation's environment that influences a manager’s decisions of how to compete. These
forces help determine an organisation's position compared to competitors in the industry.

Competitive Strategies
To find a competitive edge within the five forces, Porter suggested that managers had to
choose between three business level strategies. These are cost leadership, differentiation
and focus.
1. Cost leadership involves aggressively seeking cost reductions and techniques to
produce products more efficiently than competitors. This is a low-cost position that
undercuts competitors’ prices.
- Kmart sells everything from clothes to appliances, with a focus on close
management of costs and a restricted product range to provide customers with
products at affordable prices.
2. Differentiation strategies involve efforts to distinguish the organisation’s products
or service from others in the industry. This can be profitable because it can create
customer loyalty and a willingness to pay higher prices.
- David Jones stocks premium brands of a wide-range of products from clothes to
appliances, offering customers the opportunity to “live an extraordinary life”.
3. Focus strategies involves an organisation focusing on a specific buyer group or
regional market. Within this narrow market they can then use either a cost
leadership or differentiation strategy.
- Bunnings Warehouse is an example of a focused cost-leader. The hardware chain
uses its strong relationship with trusted suppliers to sell hardware and garden
supplies at the “lowest prices”
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Selecting New Strategies at the Corporate Level

 When an organisation is involved in a single product or business area the strategic

context is a single industry. Alignment between the corporate level strategy and
business level strategy is straightforward
 However, when an organisation moves into multiple industries, managers need to
manage a portfolio of business units  known as portfolio planning.

The Boston Consulting Group proposes one approach to portfolio planning known as the
BCG Matrix:
 Managers should evaluate the market
share and market growth of each of
their products or business areas to
determine which to grow and which to
retrench.
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Growth Strategies
 Once a manager has a good
understanding of its mix of
business units and product lines
they can decide on an appropriate
strategy for growth. A business
can grow through concentration,
diversification or vertical
integration.

Concentration
 Involves focusing on the same business area
Diversification
 Involves entering into new and different business areas
 A certain level of diversification can help an organisation succeed by spreading risk
across multiple product-lines, services and industries
 However, organisations that diversify too much or too quickly often struggle to
manage the different parts of their business which may have conflicting goals.
Vertical Integration
 Mean growth through either downstream or upstream businesses

Retrenchment Strategies
 Managers also look to decrease the scale of operations that are not doing so well
 This can involve divestment, restructuring or liquidation.
Divestment
 Involves selling parts of the organisation that are no longer part of its core
operations
 Organisations that are over-diversified may sell parts of their operations to cut costs,
improve efficiency or to help them re-focus on their core competencies.
Restructuring
 Involves reorganising the structure of the company to better align with the current
strategy.
Liquidation
 Involves bringing a company to an end

Cooperative Strategies
 Sometimes organisations to work together to develop a product or deliver a service.
 A common form of cooperative strategy is a strategic alliance
 A strategic alliance involves two organizations working together to meet an agreed
upon outcome while remaining separate entities.
Outsourcing alliance
 Involves contracting another organisation to provide functions such as payroll,
recruitment or internet services. An organisation can save money by gaining
expertise without having to build it in-house.
Platform strategy
 Involves competing based on platforms rather than on products. Platforms create
value by facilitating exchanges between producers and consumers. A platform
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strategy involves building digital platforms that make it easy to co-create value with
other organisations.

Implementing Strategy
The final stage of the strategic management process involves implementing strategy.

Strategy implementation involves managers using a number of tools to turn the strategy
from a plan into reality.
 Good leadership and culture are also key to successful strategy implementation
- Leadership involves the ability to influence people to adopt the new behaviours
needed to put the strategy into action. Leaders can influence the culture of an
organisation by shaping the values, beliefs and assumptions of managers and
employees.
 Organisations will need to ensure that they have adequate and appropriate human
resources to deliver the strategy.
 Control systems including information technology systems are also required to
successfully implement and monitor the success of the strategy.

To implement strategy, managers need to engage in three functions of managing: leading,

organising and controlling which are covered elsewhere in the course.