3 Tips for Preserving Company Knowledge

Do you have an employee with an ambiguous job title? Think of someone who has been with the company for countless years and does a great job, even if you are unsure of what they do. Now imagine losing that employee.

Many companies exist in this kind of limbo-stage, where they are highly reliant on a specific employee, but don’t fully understand their entire job purpose until the employee retires or moves on. As an employer, it is critical that you identify the qualities and tasks put on these employees before you lose them. Continue reading “3 Tips for Preserving Company Knowledge”

The art of saving our planet

Since the beginning of the 21st century, former presidential candidate and vice president Al Gore travelled the world raising awareness about the effects of global warming. In 2006, his world famous movie “An Inconvenient Truth” hit the movie theatres and people from all over the world flocked to the movie theatres to watchthis movie. It showed how the polar ice cap is melting away and demonstrated very real evidence of what will happen if the ice cap disappears completely. Al Gore’s documentary explains that one of the results of the melted polar ice cap is that all of the freshwater willrun into the sea and slow the Gulf Stream down. The worst-case scenario is that the Gulf Stream will eventually stop flowing. The effects on the northern European climate will be catastrophic as the Gulf Stream is responsible for the summers in northern Europe, and without it there is a very real possibility that the warm summer weather will disappear. Continue reading “The art of saving our planet”

Is Your Business Meeting Its Regulatory Responsibilities?

All industries are covered by legislature governing their operational responsibilities. These responsibilities may include anything from finances and employee rights, to health and safety or manufacturing guidelines. The very nature of regulatory responsibilities means that they are, for the most part, governed by law. Therefore, not adhering to them could spell disaster for your company and your employees, not to mention any third parties involved in whichever regulated procedure is being neglected. Continue reading “Is Your Business Meeting Its Regulatory Responsibilities?”

Comparison of Business Strategy Frameworks

Strategic management literature has established multiple popular frameworks which are used by decision makers to develop a roadmap for business strategy. Some of the popular frameworks for business strategy are Porter’s 5 forces model, BCG / GE McKinsey MatrixPEST analysis and the Ansoff Matrix. However, all these frameworks focus on factors which are external to the firm. In this article, however, we focus on the frameworks which are a mix of the external view of the macro-environment and the internal view of the strengths and weaknesses existing within the firm, namely the Industry Structure view, the Resource based view and the Relational view of the firm.

The Industrial Structure view is somewhat more macro-industry focused. It postulates that firms operate in an environment of competitive forces of rivalry and forces involving barrier of entry (even exit). In general industry structure refers to the distribution of firms in an industry. The existence of a large number of firms in an industry both reduces and increases opportunities for coordination among firms in the industry. Depending on the degree of consolidation or fragmentation in the industry, the macro-economical dynamics affect the firm’s competency in how it deals with the forces of competition.

In contrast, the Resource based view is somewhat more internal focused. It stresses that the competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal. To transform a short-run of competitive advantage for a firm to a sustained competitive advantage is like winning both the battle and the war. It requires creation of resources which are heterogeneous in nature and not perfectly mobile across competing firms. This again translates into the fact that the value of these resources arise from the criticality that they are neither perfectly imitable nor substitutable without great effort.

Similarly, the Relational view is a theory for considering networks and dyads of firms interlinked within the daily intercourse of business transactions, as the unit of analysis to study and frame strategies for sustainable competitive advantage. The relational view argues that idiosyncratic inter-organizational linkages are the sources of competitive advantage, whereby relationships play a major role in development and exploitation of competencies in an industry that is traditionally highly competitive.

In the next diagram, a comparative analysis of these important theories has been presented., which present how these theories are not only different, but also complement each other by taking a different lens to view the competitive landscape for a strategic decision maker.

Do let us know, if you have any query regarding more details on this article. We value the feedback from our readers very highly.

BSC – The Balanced Scorecard

The Balanced Scorecard (BSC) is a framework for strategic management, used to monitor and align performance of an organization or a division of the same. It is a semi-standard yet more or less structured report, supported by some established design methods and tools, that can be used by management executives to keep track of the execution of plans / assignments by the staff within their control and to evaluate the possible consequences arising from the execution of these plans. Introduced by Robert Kaplan (Harvard Business School) and popularized by Bain & Company, the Balanced Scorecard has become one of the most popular frameworks for project monitoring and management and align the same to the vision and mission of the organization, be it an industrial, government, or nonprofit organization.

Ref: Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System”, 1996, Harvard Business Review, Vol. 76.

Balanced_Scorecard

There are 4  major process that needs to be balanced in BSC:

  1. The Learning & Growth process
  2. The Business process
  3. The Customer process
  4. The Financial process

The learning and growth process involves all the plans and programs an organization or a department is undertaking in terms of training and development related to both individual and corporate self-improvement. It extends the concept that in a knowledge based organization,people or the human resource is the most critical resource to organizational development.  This section posits the use of metrics to evaluate performance, progress and development of the human resources of an organization.

The Business Process takes into consideration to develop metrics to measure the performance of the internal processes of an organization. It helps to map development in process efficiencies with incremental changes in internal processes. Process management metrics and workflow management metrics are used in this process to evaluate performance vis-a-vis improvements. Incremental improvements the the processes in terms of meeting targets (say process efficiencies) are measured and how the implementation of plans to meet such targets were conducted, is scrutinized in this process.

The customer process takes into account the philosophy of customer orientation in an organization. In current times, there has been an increasing realization of the importance of customer focus and customer satisfaction in any business. The focus in this process is predominantly Customer Lifetime Value management and in the next stage, harness the Customer’s network value. Incremental improvements in each objectives in terms of meeting targets is measured and how the implementation to meet such targets were planned, is scrutinized in this process.

The financial process is another crucial dimension in the BSC. Although managers using the BSC do not have to rely solely on short-term financial measures as the most important indicators of the division’s performance, financial measures are none the less, extremely relevant and are often recognized as the most critical process by many practitioners. Measures such as financial ratios, total revenue from sales, total cost, cost structure improvements, and indirect sources of revenue are scrutinized against their targets, in this process.

These processes are mapped against each other to check how the organizational vision and mission are being adhered to within a division while implementing ploys and strategies. These help in providing a way to construct a concrete step-by-step path of development for the executives of a division or of an organization.

However, the limitation of the Balanced Scorecard is that it has been severely criticized by scholars  for its inability to link a company’s long-term strategy with its short-term ploy. It has become overused in many organizations, sometime not in the most desirable way, as it was conceived when developed.

 

industry, government, and nonprofit organizations

PEST Analysis

PEST analysis stands for “Political, Economic, Social, and Technological analysis“. It is a framework for Strategic analysis of markets to evaluate macro-environmental factors used in the environmental scanning component. Some analysts add the Legal factors to the analysis.

Thus when the PEST analysis is expanded to incorporate legal and environmental factors; this is called a PESTLE analysis or a PESTEL analysis.

  • Political factors pertain to how the government intervenes in the economic functioning of the country (market) and more specifically how it affects the firm strategic decision making. Political factors such as tariffs, tax policy, labor laws, trade restrictions,environmental law, and political stability. Political stability is a major factor which affect the firm’s strategic decision making and overall legal framework.
  • Economic factors consists of interest rates, government bond rates, risk free rate of interest, economic growth, inflation rate (adjusted) and exchange rates.  These factors have major impacts on how a firm can operate in a market. Inflation rate and potential GDP affect the demand and prices of goods.
  • Social factors include the cultural dimensions of the population in which the firm will operate and include gender consciousness, gender based product/service bias, population growth rate, age spread, health consciousness, career attitudes and risk appetite of the target segment.
  • Technological factors consists of factors such as research and development focus in general industries, intellectual property protection laws, technology adoption rates, change assimilation culture, automation and the rate of technological change. They affect entry barriers, technology enabled products and service assimilation,  product prices, quality, and innovation.
  • Environmental factors consists of factors like ecological and environmental aspects such as forestry  and  climatic conditions which may especially affect industries such as tourism, farming, and insurance.
  • Legal factors focus on discrimination laws, intellectual property protection laws, labor laws, consumer laws, antitrust laws, employment laws, health laws, safety laws and social security laws which can affect how a firm operates, its bottom-line (cost structure) and the demand and distribution for its products and services.

The PEST framework has been recognized as an extremely popular framework for market analysis. It is a part of the external analysis conducted while demonstrating an in-depth strategic analysis during new market entry or doing market research for a new product launch or even sometimes during a product extension, and gives an overview of the different macroenvironmental factors that the company has to take into consideration. It is a useful theoretical tool for estimating market growth or decline, business position, potential and direction for operations.

It is an important complementary extension of the Marketing Mix strategies and often it is used as an alternative analytical tool for Porter’s 5 forces model (although not appropriate for the same).

 

Value Creation Strategy – Business Model

To create sustainable, long-term value for all the stakeholders of a firm, it is important to explicitly establish an appropriate stakeholder value target. However what would constitute the “success” condition for all the stakeholders of a firm would vary from the goals of individual stakeholder. For an investor in a firm, value may be seen as through higher market price of his stocks and bonds, where as, for a mid level worker, value may mean better returns in terms of satisfaction from the job, maybe in terms of pay grade improvements or in terms of job satisfaction. Although, what constitutes “value creation” may be dependent on stakeholder perception, for a generic strategic framework, there is a need to conceptualize a generic framework to achieve a target so the value may be created for the firm as a whole, in strict strategic sense.

The key to reach this target and achieve a sustainable competitive advantage is the alignment of business strategy, financial strategy, technology strategy, marketing strategy and investor strategies. One such model developed in strategic management literature is that of Strategy Maps.

In Strategic Maps framework, value is created through 3 main organizational resources, namely Human Capital, Information capital and Organization Capital.

As depicted in this model, value for a firm is essentially created through the interaction of  four processes, namely, “Operations management processes“, “Customer relationship management processes“, “Innovation processes” and “Regulatory and Social processes“. Under each process, there are lots of transaction level processes which create value. Monitoring and strategizing on the value creation of  transaction level processes is the functionality of Mid Level management in the organization which may be termed as “Ploy for Value Creation“. Focus here could be “Ploys” for improving cost structure or improving asset utilization within the firm. The objective at this level is to focus on productivity enhancing strategies.

For the executive senior management, strategy formulation for the purpose of “Value creation” would have a different focus. Their objective could be to expand the revenue opportunities through entering a new marketdecide a growth strategy for a product or market, or focus on Business Diversification strategies. In short, the role of the executives would be to evaluate various growth strategies for the firm, which could lead to huge revenues and thus economic value creation in the near future, upon realization of the plan post implementation of the strategy.

There are many other strategic frameworks for the creation of value for businesses which have their individual merits and limitations.  Another popular framework for value creation is that of Prahlad et al. (2004)

Do let us know if you have any query.

 

Market Entry Strategy for International Business

An international market entry strategy is defined as the planning and implementation of delivering goods or services to a new target international market. It often requires establishing and further managing contracts in a new foreign country. Few firms successfully operate their business in a niche market without ever planning to expand into new markets (mostly due to the localized nature of their Business) but most firms strive to expand through increased sales, brand awareness and business stability by entering a new market. Developing a win-win market entry strategy involves a thorough analysis of  multiple factors, in a planned sequential manner.

For a generic framework for Market Entry Strategies read our article here.

There are 2 basic Strategic Frameworks for Market Entry Strategies which are all dependent on Product type and the Product Lifecycle.

These frameworks have been developed built upon the theories of Innovation Diffusion Models in monopoly and a competitive Game Theory frameworks based on theories of Business Economics.

Market-Entry-Framework

The Waterfall Strategy

In a Waterfall strategy, the business is spread in international markets sequentially. First a firm enters a new market and establishes an identity in the same. Establishing an identity involves estimation of potential market size and revenue patterns, identification of target segment, creation of brand awareness, identification and creation of possible distribution channels and finally formulation and implementation of sales strategy. All these strategies at individual stage is dependent on the product type and the life cycle.

Once the product identity is established in the new market, the learning from the same is utilized to expand into another new market, somewhat with similar structure, sequentially. Learning is an iterative process in such a strategy formulation and it is a less risky process of expansion of business.

Typically, products with a longer product life-cycle or in the maturity phase would follow a Waterfall Strategy, for expansion into new markets.

 

The Sprinkler Strategy

Markets are approached simultaneously in the sprinkler strategy. While this is a more risky strategic framework for entering new markets, typically it is more suitable for products with a shorter life cycle (like Technology products) or are at the Introduction and Growth Stage of the Product Life Cycle. In such a strategic framework, markets are entered simultaneously and often a Skimming Product Pricing strategy is used to generate as much profits as possible from sales. Experiences from market responses are limited to individual markets and the same are not replicated in the other markets.

 

While there is a third Strategic Framework (Namely the Wave Strategy ), it is much less popular for its limitations.

Have you read the article on the Porter’s Five Forces analysis of industry competitiveness? This is a must-read article for anyone planning to get into a new market.

Ansoff Matrix

The Ansoff Growth matrix is a tool that helps firms decide their product and market growth strategy based on objective analysis of industry structure and product type. It is one of the more popular tools for strategic management analysis, in the scenario of deciding the case for a related diversification of businesses and firms, which itself is a highly risky strategic decision. Continue reading “Ansoff Matrix”

Michael Porter’s 5 forces model

Porter’s 5 forces model is one of the most recognized framework for the analysis of business strategy. Porter, the guru of modern day business strategy, used theoretical frameworks derived from Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. This theoretical framework, based on 5 forces, describes the attributes of an attractive industry and thus suggests when opportunities will be greater, and threats less, in these of industries.

Attractiveness in this context refers to the overall industry profitability and also reflects upon the profitability of the firm under analysis. An “unattractive” industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching “pure competition”, from the perspective of pure industrial economics theory. It is important to note that this framework is not for the analysis of individual firms but for the analysis of the industry.

Despite its limitations in the technology enabled business era, Porter’s 5 forces model is still the leading framework for the analysis of industry attractiveness. The limitations of the Porter’s 5 forces model induced the introduction of the 6th Force, namely the Complementors.

This model comprises of an analysis dependent on 4 entities external to the firm and the fifth force: the Industry structure. These forces are defined as follows:

  1. The threat of the entry of new competitors: This encompasses the challenges surrounding if new competitors were to enter the same industry, how would the profitability be affected? This is measured by the indicators which are detailed subsequently and is a proxy measure for the degree of attractiveness of the industry. Factors couls be issues surrounding economies of scale, proprietory product differences, brand identity, switching costs for the customers, capital intensive nature of the industry, access to distribution channels, absolute cost advantages, government policy surrounding new entrants and potential retaliation or fallouts. Higher is the threats of entry of new competitors, lower is the industry attractiveness.
  2. The intensity of competitive rivalry: This is captured by a number of metrics like the growth rate of the industry, the ratio of cost structure to the value added, cost of over-capacity, degree of output differences among competitors, impact of brand and its conversion to sales, switching costs, concentration among the leading players (Herfindal Index), Information flow and complexity, diversity of competing businesses and exit barriers. Higher is the intensity, lower is the industry attractiveness.
  3. The threat of substitute products or services: This is captured to understand to what extent there is a possibility of the industry’s product or services being substituted by some other category of products or services. Factors which predominantly matter in this force are the relative price advantage of the substitutes, relative functional performance advantage of the substitute, switching costs of the customer for moving to the substitute and the customer’s propensity to substitute.
  4. The bargaining power of customers / buyers: This force tries to estimate the degree of bargaining of post-facto relationships that may be empowered due to the dynamics of the relationship. This could be captured through some metrics like the buyer’s concentration as compared to the Industry’s concentration, customer’s volume vs industry output, customer’s switching cost, price sensitivity, degree of product differences, buyer’s profits and decision maker’s incentives. Higher is the bargaining power of the customer, lower is the industry attractiveness.
  5. The bargaining power of suppliers: This force tries to explore the impact of the bargaining power of the industry’s suppliers and how much they can force the industry to share the benefits of value creation through this bargaining power. Factors are covered in terms of differentiation of inputs, switching cost of the suppliers, relationship specific investments required, presence of substitute inputs, supplier’s industry concentration, importance of volume to the suppliers, cost relative to the total purchases in the industry, impact of supplier’s inputs to overall cost structure or differentiation, threats of forward integration, and potential for backward integration. Higher is the bargaining power of the suppliers, lower is the industry attractiveness.

A detailed explanation of what these forces comprise of is provided in the diagrammatic representation of these 5 forces next.

The 5 forces model has been developed as a response to the SWOT analysis of competitiveness of firms, and has continued to remain the most popular framework in business strategy.

The individual dimensions of the 5 forces has been described in details in the diagrammatic representation of the five forces model. The individual scores on theses dimensions may be mapped to a 7 point Likert Scale. Likert scale basically is an ordered, one-dimensional scale from which respondents choose one option that best aligns with their view.The linguistic values for the same would be Very Strongly agree, Strongly agree, Tend to agree, Neither agree nor disagree, Tend to disagree, Strongly disagree and Very strongly disagree.

These responses on the Likert Scale can then mapped quantitatively to -3 to +3 on the extreme points. The mean of the score can be reconverted in the linguistic variables on the Likert Scale and then expressed as whether the particular force is Very Strong, Strong, Slightly strong, Neither strong nor weak,  Slightly weak, Weak, Very Weak.

Although the Porter’s Five forces model is very popular in terms of usage, one must be aware of the limitations of this framework. No framework can be comprehensively understood unless its limitations are understood as well.

By the way do you know what framework you should consider while deciding on a market entry strategy?

Generic Strategies for the Ultimate Competitive Advantage

“An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage” ~ Jack Welch

Today, the firms operate in an even more competitive industry dictated by an ever unparalleled dynamism. Jack Welch never said anything more meaningful. In current times, when change is the only thing that is constant, a firm’s ability to learn, and more importantly “unlearn and then relearn” creates the most important distinguishing factor for sustainable competitive advantage.

Michael Porter’s framework for competitive advantage probably explains few of the focus issues firms may keep in mind while formulating strategies at the top level.

However, this is the way to achieve sustainable competitive advantage and a firm’s top executive needs to understand the core to his firm, based on which he can take this call. However, due to the dynamism of the industry structure, he needs to continually analyze and re-evaluate his strategies, based on the core.

A firm probably has multiple dimensions of personality traits, talents, resources and skills, and hundreds of other characteristics, but what is it that when all the others are surgically removed distinguishes the character of the firm at the very core? This is essentially the key which needs to be leveraged successfully and innovated upon continually to attain that otherwise illusive competitive advantage.

So how does one recognize one’s core?

One may argue that achieving “customer loyalty” may be a step towards achieving a sustainable competitive advantage. It’s not a secret that loyal customers are good for an organization or brand. You don’t see too many executives saying they don’t want more of them. But in spite of that what intrigues me is how few companies truly acknowledge, take care of and leverage those loyal customers in a way that measurably accelerates market share and recurring revenue while mitigating competitive risk and reducing sales & marketing costs. But in spite of  “customers” being a crucial focal point for business, it is required to recognize that in current times, the very nature of business is evolving. With the very definition of a firm’s role in an industry or even the definition of the industry under such a strict evolution, it is crucial to note that the very target customers are deemed to change in this dynamic market structure. So identifying and acquiring new customers, in spite of the spiraling costs of new customer acquisitions, may play a key role for sustenance.

Thus a firm’s source of resources for the “Ultimate Competitive Advantage” is much more than the sources of revenue. Smaller firms whose ability to learn and “unlearn and then relearn”have reaped the benefits in the past. The problem started after they grew to a certain size where they couldn’t stay so nimble on their feet, and faced competition from other firms, who were more adaptive to the dynamic industry structure.

Sometimes, one tends to think that probably a firm’s organization structure and the culture is the inherent and most important source of competitive advantage. But how can a firm leverage that to quantifiable profits since at the end of the day, business decisions are based on ROI figures and financial achievements. This is probably where a firm needs to rediscover itself.

How to build a Successful Business Model or a Business Plan?

Business Models are crucial for the success of an enterprise or even a startup. So what do you need to focus on while building up your business from scratch? A Business model or a Business Plan (B-Plan) helps you to plan this properly.

  • What are the firm’s core capabilities?
  • How does the firm deliver value to its clients? How does the network with its partners/collaborators (value chain) add to its core competencies. How does the value chain model collaborate with the firms current strategies?
  • What is the cost structure in the business vis-a-vis that of the firm?
  • How is the value proposition unique and sustainable in the long run?
  • How does the firm manage its distribution channels and relationships / liasons with the customers?
  • How is the targeted customer contacted, acquired and retained?
  • What are the sources of revenue and the structure of the same?
  • How does the vision/mission statement adhere with what the firm is doing now and what it is planning to do in the future.

Growth Strategies of Web Based New Generation Firms

The cyber world has really come alive with the onslaught of WEB 2.0 technologies. Today, many start ups are being formed by students and entrepreneurs across the world. The web based firms with often no brick and mortar presence have been generating enviable returns, considering the low investments made on them. No wonder, students and young entrepreneurs have started viewing these businesses as endless oceans of opportunities. These firms share some very common characteristics, which are as follows:

  • Being led by young leaders, their culture is essentially fun. The job nature often is based on interactions with others (say for instance in the numerous SEOs springing up).
  • The concept of flexi-work or work from anywhere, anytime has really caught up. Most of the start ups consists of students in their engineering and graduation level.
  • The need of initial investments being very low,  savings from pocket money is often sufficient to start these ventures. ROI, if properly strategized is often very high. In fact, being web-based only, these start-ups do not have the burden of making huge investments on physical infrastructure.
  • A major trend in such start ups is their dynamism of defining their business. Often the fixed costs or investments are such that they would apply to various businesses. So if one business flops, there is always a backup plan easily available. So many web based businesses which may start as sites to sell software may end up doing affiliate marketing for some other products.
  • These firms also have the benefits of having the ability to take small risks which can generate huge rewards, in terms of returns on investments. The very nature of defining their business according to changing needs and trends, makes the business risky, yet provides a great opportunity to generate a huge return.

A major problem for these firms is how to decide upon a proper growth strategy. Most such endeavours begin with a lot of enthusiasm, but the same dies out, when the owners fail to generate the expected income from the same. A few generic points which could be kept in mind while trying to build upon the business are given below:

  • Being essentially web-based, you must have visibility on the web. To ensure that, the first thing you must ensure is a decent traffic to get a decent alexa rank. Now here, many start ups thrive on exchanging links for promotion. While this ensures some traffic to your website, one should remember that you are not actually reaching out to your target segment.
  • After some degree of visibility on the web is obtained, it is required to ensure that there is visibility amongst search engines. Most depend on the umpteen so called SEO companies (Search Engine Optimization) to do this job for them. Problem is these SEO firms ensure a decent alexa rank for your site by exchanging links and promotions amongst themselves only. So depending overtly on them is suicide. The only thing that creates visibility among search engines is quality content. In the WEB 2.0 era, content is the mantra to success.
  • Use of content management sites help in the promotion and visibility of your site. But always remember, not all content management site is suitable for all needs. Expending effort and resources on the correct content management site is crucial for your visibility amongst your potential customers.
  • Try reaching out to your targeted customers. Use a sustainable advertising means for that, like a facebook fan page or twitter. Always remember, it is better to reach out to 100 customers really interested in your product that to 10,000 people who don’t care about your existence. Segmentation, Targeting and Positioning are your success mantra.
  • WEB 2.0 is all about differentiation from your competitors. Are you simply doing things differently or are you able to present yourself as doing different things too?
  • Use videos and pictures to make the site as interactive as possible. Your customers may not always have the time or patience to go through textual content.

These are just few pointers on the few aspects the new generation web based firms must look into for success. These aspects form the core of all the businesses yet when one launches his own business, these very simple yet much needed points are often forgotten.

By the way, have you read our article on Value Creation Strategy and Business Models?

Also you can check out our article on the Business Strategies while setting up an e-Commerce Portal.

The GE-McKinsey matrix and its Limitations for Business Portfolio analysis

A business portfolio is defined as a collection of Strategic Business Units, commonly called SBUs, that make up a firm or a corporation. The optimal business portfolio (a dream for all organizations) is the combination of multiple SBUs such that it helps to exploit the most attractive industries or markets, keeping in mind the competitive strength and weaknesses of the parent corporation or the firm. A SBU can either be an entire company or a division of a large firm, that formulates its own strategy and has separate objectives from the parent organization.

The major objectives of a portfolio analysis of SBUs is to achieve the following:

  • Analyze its current SBU portfolio to decide which SBUs must receive more or less investment
  • Develop growth strategies for adding new SBUs
  • Decide which SBUs must no longer be retained by the parent organization

For the same, BCG Matrix was first proposed by the Boston Consulting Group.  Due to the simplicity of the model, it had its own set of limitations, which was further addressed by the GE-McKinsey matrix.

Based on the location, the strategy flow diagram depicts the actions to be taken by the organization, post analysis with the BCG matrix or the GE-McKinsey matrix.

Typically Market Competitiveness of a SBU is estimated by analyzing the market size of the SBU, the market growth rate, the market profitability, the competitive intensity / rivalry, the overall risk of returns in the industry, the entry barriers, the pricing trends,  opportunity to differentiate, demand variability, segmentation,  distribution structure and the technological development. Similarly Competitive Strength of the SBU is estimated by factors such as strength of assets and competencies, market share, market share growth potential, brand strength, customer loyalty, relative cost structure, relative profitability, distribution strength, production capacity, record of innovation, management strength and access to financial and other investment resources.

Now the GE-McKinsey model, like all generic strategy models has its own set of limitations.

  • A major assumption behind the GE-McKinsey matrix is that it can operate when the economies of scale are achievable in production and distribution. Unless the same holds true, the concept of leveraging the competencies of the firm and the SBU falls flat.
  • Also some of the factors of competitive strength and market competitiveness may be extremely important for a particular instance, while another instance may even require even other factors. The top management of the organization should decide upon these factors very carefully as there is no generic set of factors with which all SBUs may be evaluated.
  • The relative weightage given to each of the factors of competitive strength and market competitiveness is often arbitrary. While some methodology such as the Analytic Hierarchy Process may be used to compute the relative importance of such factors, such is mostly not done. Thus the overall position of the SBU on the matrix could come under criticism.
  • The core competencies of the firm or the corporation are not represented in this analysis. The core competencies may be leveraged across SBUs and can be a deciding factor while judging the competitive strength of the SBUs

If you feel there are any more points which I could incorporate in this explanatory article, feel free to comment and let me know.

By the way, have you read our article on Value Creation Strategy and Business Models?

Also, you may find the article “Growth Strategies of Web Based New Generation Firms” interesting.

How the internet affects Porter’s generic strategy models

In the emerging global economy, e-commerce and e-business have increasingly become a necessary component of business strategy and a strong catalyst for economic development. Michael Porter (1980) 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.

Research has indicated how Porter’s generic strategies would work in the light of ICT enablement of businesses. By applying cluster analysis, researchers were able to differentiate 5 strategy types, which would be significant in e-businesses.

  1. The first strategy, which they call the “Hybrid Strategy”, was pursued by firms which were engaged in diverse market domains with diverse products, take advantage of online specific differentiation factors, and at the same time, pursue cost advantage.
  2. The second strategy that firms focused on had a positive and distinctive value only on the cost leadership dimension.
  3. The third strategy type occupies a less than even mediocre position on every strategic dimension and these firms have only a poor focus on internet specific differentiation. This may reflect lack of clear strategic direction and resource commitment.
  4. The fourth strategy type resembles Porter’s differentiation strategy. This type scores high on market leadership and product proliferation dimensions, indicating an emphasis on staying sensitive to customer needs through diverse products with short life cycle.
  5. The last strategy type is high on both the focus and Internet-specific differentiation dimensions, while also ranking very low on the other dimensions.

These firms do not appear to be concerned with price competition or overall market leadership. Instead, they appear to aim at a small segment of online customers, emphasizing Internet-specific factors such as transaction security and payment convenience. This strategy type is labeled “Online Focus.”  Based on their study, they concluded that, among e-business firms, a hybrid, integrated strategy is a must, and that a traditional cost leadership strategy is unlikely to be associated with success. They also suggest that focused strategies – those that are either narrowly defined differentiation strategies or those that focus on Internet-specific characteristics such as security and convenience of transaction – may have a better chance of success than cost leadership strategies.

A winning framework for market entry strategies

A market entry strategy is the planned method of delivering goods or services to a new target market and distributing them there. This article talks about the critical issues that needs to be considered while entering a new market and suggests a list of actions that would mitigate the risks involved better, and hence successfully enter the market.

A market entry strategy is the planned method of delivering goods or services to a new target market and distributing them there. When importing or exporting services, it refers to establishing and managing contracts in a foreign country. Few companies successfully operate in a niche market without ever expanding into new markets but most businesses achieve increased sales, brand awareness and business stability by entering a new market. Developing a win-win market entry strategy involves a thorough analysis of  multiple factors, in a planned sequential manner.

When an organization makes a decision to enter an new market, there are  various issues that needs to be thought out. These options vary with cost, risk and the degree of control which can be exercised over them. The simplest form of entry strategy is often exporting, using a direct (agent) or indirect method (counter trade). More complex forms include truly global operations which may involve joint ventures, or export processing zones.

An organization wishing to enter a new market faces 3 major issues:

  1. Marketing – which markets, which segments, how to manage and implement marketing effort, how to enter – with intermediaries or directly, with what information?
  2. Sourcing – whether to obtain products, make or buy?
  3. Investment and control – joint venture, global partner, acquisition?

Firms can follow the mentioned steps in sequence to create that successful blend of strategies while entering a new market.

Planning these few steps in details would ensure that firms face less risk while entering a new market during expansion. Although there is no absolute success mantra to enter a new market, these activities would significantly lower the risk exposure of the firm and create a winning scenario.

Have you read our article on the Porter’s Five Forces analysis of industry competitiveness? This is a must-read article for anyone planning to get into a new market.

Read more about market entry frameworks.

How to analyze business case studies

There is no one best approach to analysis of an management case study. However, a number of general steps and guidelines can be followed to ensure better case analysis. Although the following steps are presented sequentially, it may be necessary during a specific case analysis to reorder or modify them, as they are intended to provide a general framework.

  1. Preview the case. The purpose of the first step is to give you an overview of the case and the existing situation. You may wish to read rapidly or to skim through the case, taking notes and jotting down important ideas, key problems, and critical factors. You may even wish to write down ideas relating the main problems or issues in the case at this point.
  2. Read the Case. Once you have previewed the case read it in detail, taking careful notes on important facts, problems, and issues found within the case. While you are reading the case in detail, you should be looking for major problems, sub-problems, controllable and uncontrollable variables, constraints and limitations, alternatives available to the organizations, and possible quantitative techniques that might be used in solving the problems facing the organization. To formulate the problem, it may be necessary to reread certain parts of the case. After the problem has been formulated, it should be summarized and recorded in writing.
  3. Formulate the Problem. If you have done a good job with the first two steps, problem formulation will be greatly simplified. The purpose of this step is to specify the major problem or issues at hand. At this point, you should not be concerned with what techniques may be used to solve the problem. Instead, you should strive to isolate the major issues and the central problems facing the organization. To formulate the problem, it may be necessary to reread certain parts of the case. After the problem has been formulated, it should be summarized and recorded in writing.
  4. Identify Important Variables. Once the problem has been identified, the next step is to identify important variables. These variables could be the number of people in a maintenance department, the number of items to produce in a manufacturing operation, the return from an investment, the state of the economy in six months, the outcome of future legislation or a political race, and so on. The variables that are identified in this step should be related to the problem. Only those variables that could have an impact on the problem should be identified. Furthermore, it is important to distinguish between controllable and uncontrollable variables. A controllable variable is one over which the manager or decision maker has total control. An uncontrollable variable is one over which the manager or decision maker has little or no control.
  5. Determine Organizational Objectives. Before any problem can be solved, it is necessary to specify the goals and objectives of the organization. For most situations, this will be profit maximization or cost minimization. However, other organizational goals or objectives may be important. For example, a company may wish to avoid stockouts, or a hospital may desire a specific patient-to-doctor ratio. It is desirable to specify mathematically the objectives of the organization. For example, it may be possible to develop a mathematical expression for the organization’s profit. This could be similar or identical to the objective function of a linear programming problem. If it is impossible to write a mathematical expression for the organization’s objectives, a concise written statement of the organization’s objectives should be prepared.
  6. Determine Organizational Restrictions or Constraints. Typically, companies and organizations have a number of limitations or constraints over which they have little or no control, for example, short-run restriction of plant capacity or legal restraints on trade and business interactions. Whenever possible, mathematically specify these restrictions and constraints. When such specification is not possible, a concise word statement should be written.
  7. List the Alternatives. The next step is to list the alternatives available to management in solving the problem. A common mistake is not developing a complete list. Creativity and imagination are useful talents to use in developing viable alternatives. If an alternative is not listed, it likely will not be considered during later stages of analysis. As a result, many viable alternatives may be totally overlooked. Don’t forget that you will always have the alternative of doing nothing.
  8. Analyze the Assumptions. The eighth step is to discover and specify assumptions that must be made in analyzing the case. You may have to assume, for example, that demand for a particular product over a specified time period is constant; or that the only relevant inventory costs are holding costs and carrying costs; or that the arrival of individuals at a hospital is Poisson distributed. All relevant assumptions must be concisely formulated and listed.
  9. Select a Quantitative Technique. If a good job has been done in the previous steps, it will be easy to select the appropriate quantitative analysis technique. This technique will allow you to solve the problem and obtain the organizational objectives without violating the inherent restrictions and constraints, while operating within the assumptions of the situation.
  10. Acquire Input Data. Once a quantitative technique has been selected, the next step is to acquire the necessary input data. To do this you simply identify what inputs are necessary and locate these data in the case. In some cases, however, the necessary input data for one or more quantitative techniques will not be presented in the case. For these situations, it may be feasible to make assumptions about the input data. If such assumptions are made, don’t forget to list them in Step 8.
  11. Develop the Solution. This usually involves the application of one or more quantitative techniques, such as linear programming, the transportation algorithm, an EOQ model, and so on. Many times the solution should also embody important qualitative and judgmental factors that cannot be quantified. Your solution should be both quantitative and qualitative. People solve problems; models do not. If the assumptions made in applying the quantitative techniques are not consistent with the situation, the techniques should not be used or should be used as an input factor along with other judgmental factors in making a sound decision.
  12. Test the Solution. When quantitative techniques are used, the solution should be tested for both internal and external validity. Internal validity checks the extent to which the model and quantitative analysis technique are internally consistent and accurate. External validity investigates the extent to which the solution and model accurately represent the actual situation under investigation. All management science techniques can undergo sensitivity analysis. Sensitivity analysis is used to determine how sensitive the final solution is to changes in the input data or in the model itself. Solutions that are highly sensitive should be analyzed with care. If the input data could be inaccurate or if the model could be incorrectly specified, great care should be taken in interpreting the solution.
  13. Analyze the Results. The solution of the quantitative technique may represent only one of many inputs a decision maker uses in solving the stated problem. Moreover, the model results may have to be tempered with information about the environment, the assumptions of the model, and the quality of the input data. Analyzing the results involves incorporating the management science solution with the judgmental factors that have an important bearing on the possible alternative actions. At this stage, it may become apparent that you have incorrectly formulated the problem, and thus it will be necessary to return to an earlier step to incorporate considerations not previously included. The result of this step is a written statement that integrates the quantitative techniques with all other factors deemed important to the solution of the stated problem.
  14. Formulate the Action Plan. The formulation of the action plan is an extension of the analysis of results (the previous step). Here you must make specific recommendations aimed at solving all of the present and future problems. Undesirable situations that may occur in the future should be addressed during this state. In addition, the action plan should also embody the rationale you used in selecting alternatives for inclusion in the action plan.
  15. Present the Action Plan. The action plan or recommendations can be presented either in writing or verbally during class discussion. Because of the importance of this presentation, the following section will be devoted to presenting the results of case analysis, and therefore, this topic will not be discussed at any length at this point.
  16. Implement, Evaluate, and Maintain the Action Plan. Unfortunately many people believe their job is over after the action plan has been formulated. However, for an action plan to be useful, it must be carefully implemented and periodically evaluated and maintained. Implementation is the process of placing the plan into action; it requires that you develop written procedures for making the action plan operational. Procedures should also be established to force the periodic evaluation and maintenance of the action plan. As we live in a dynamic environment, it becomes necessary to evaluate the action plan periodically and modify it as necessary. This modification is called plan maintenance.

Following these simple steps would ensure a sure shot success.

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