The resource-based approach has profound implications for companies’ strategy formulation. When the primary concern of strategy was industry selection and positioning, companies tended to adopt similar strategies. The resource-based view, by contrast, emphasizes the uniqueness of each company and suggests that the key to profitability is not through doing the same as other firms, but rather through exploiting differences. Establishing competitive advantage involves formulating and implementing a strategy that exploits the uniqueness of a firm’s portfolio of resources and capabilities (Carpenter & Sanders, 2009). This is why resources and capabilities related to the company’s competitive advantages are more important than other resources and capabilities.
A good example of such resource utilization is the revival of Walt Disney in 1984-1988 period, when the unused land in Florida was turned into an hotel and a resort. This was the start of Disney’s expansion into resort vacations, conventional business and residential housing.
The resource-based view emphasizes the internal capabilities of the organization in formulating strategy to achieve a sustainable competitive advantage in its markets and industries. If we see the organization as made of resources and capabilities which can be configured (and reconfigured) to provide it with competitive advantage, then its perspective does indeed become inside-out. In other words, its internal capabilities determine the strategic choices it makes in competing in its external environment. In some cases an organization’s capabilities may actually allow it to create new markets and add value for the consumer, such as Apple’s iPod and Toyota’s hybrid cars. Clearly, where an organization’s capabilities are seen to be paramount in the creation of competitive advantage it will pay attention to the configuration of its value chain activities. This is because it will need to identify the capabilities within its value chain activities which provide it with competitive advantage. For example, Toyota’s much admired manufacturing system manages inbound logistics in the form of excellent material and inventory control systems.
One of the most widely used strategic planning tools is SWOT analysis (Carpenter & Sanders, 2009). Strengths represent those skills in which a company exceeds and/or the key assets of the firm. Examples of strengths are a group of highly skilled employees, cutting-edge technology, and high-quality products. Weaknesses are those areas in which a firm does not perform well; examples include continued conflict between functional areas, high production costs, and a poor financial position. Opportunities are those current or future circumstances in the environment that might provide favorable conditions for the firm. Examples of opportunities include an increase in the market population, a decrease in competition and a legislation that is favorable to the industry. Threats are those current or future circumstances in the environment, which might provide unfavorable conditions for the firm. Examples of threats include increased supplier costs, a competitor’s new product-development process, and a legislation that is unfavorable to the industry. After a firm has identified its strengths and weaknesses, it should determine the significance of each factor. It is possible to create an external positioning strategy on the basis of SWOT analysis. The SWOT Matrix is an important matching tool that helps managers develops four types of strategies: SO strategies—use a firm’s internal strengths to take advantage of external opportunities, WO strategies –are aimed at improving internal weaknesses by taking advantage of external opportunities, ST strategies – use a firm’s strengths to avoid or reduce the impact of external threats, and WT strategies—are defensive tactics directed at reducing internal weaknesses and avoiding external threats (Carpenter & Sanders, 2009).
Before a company enters a market or market segment, the competitive nature of the market or segment should be evaluated using Porter’s five forces analysis. Porter suggests that five forces that collectively determine the intensity of competition in an industry are: threat of potential entrants, threat of potential substitutes, bargaining power of suppliers, bargaining power of buyers, and rivalry of existing firms in the industry.
For each of the examples (clothes manufacturer, and car manufacturer) the position within the industry is determined by strengths and weaknesses of the company itself, external threats and opportunities shaped by Porter’s five forces affecting the market, and market share occupied by the company. For a clothes manufacturing industry, the threat of potential entrants is rather high, threat of potential substitutes is medium (people can opt for cheaper clothes or for different types of clothes, but will still continue buying clothes), bargaining power of suppliers is rather low (except some powerful brands), and rivalry is high. Thus, the clothes manufacturer should either use a cost leadership strategy or a differentiation strategy basing on the exclusivity of the brand, cost of the supplies and labor, distribution channels and current market share.
For car manufacturers, the situation is different. Here the threat of potential entrants is quite low, threat of potential substitutes is moderate (and high in crisis times), bargaining power of suppliers is moderate, and bargaining power of buyers is closer to low. Rivalry between the existing firms in the industry is rather tight, but the major players like Ford, Toyota, General Motors etc. compete within an oligopoly. Car manufacturer is likely to use differentiation strategy, and can also shape the market by creating new vehicles. Thus, the position in the industry will be determined by the market share, consumer preferences and innovative power.
A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures. This is the time when many mergers and acquisitions can take place, leading to more reasonable concentration ratio in the industry. Mergers and acquisitions may also be part of collusion in the conditions of an oligopoly, but it is considered as illegal practice.
In addition to merger and acquisitions, businesses can also combine through joint ventures, strategic alliances, monitory investments, franchises and licenses (Carpenter & Sanders, 2009). Joint ventures are cooperative business relationships formed by two or more separate parties to achieve common strategic objectives. Each of partners in a joint venture continues to exist as a separate entity. In contrast, strategic alliances generally fall short of creating a separate business entity. They can be an agreement to sell each firm’s products to other’s customers or to co-develop a technology, product or process. Minority investments require little commitment of management time and may be highly liquid if the investment is a publicly traded company. Licenses require no initial capital and represent a convenient way for a company to extent its brand to new products and new markets by licensing their brand to others. Alternatively, a company may get access to a proprietary technology through the licensing process. A franchise is a specialized form of a license agreement granting a privilege to a dealer by manufacturer or a franchise service organization to sell the franchiser’s products or services in a given area. The major attraction of these alternatives to outright acquisition is the opportunity for each partner to gain access to other’s skills, products and markets at a low overall cost in terms of management and money. Major disadvantages include limited control, the need to share profits, and the potential loss of trade secrets and skills to competitors.
Regardless of the industry, a well conceived cooperative alliance, regardless of whether the partner is domestic or foreign, will have a set of common essential characteristics.
- critical driving forces – driving forces (strategic and operational) for both companies should be complementary
- strategic synergy – complementary strengths will yield strategic synergy
- chemistry – managerial ability to cooperate efficiently as the result of positive, team-oriented, trust-filled relationships between key sponsors
- win-win alliance – the operation, risks, and rewards must be fairly apportioned, and the alliance should provide greater value to the customers
- operational intergration – the style of operations (goals, rewards, methods of operations) and methods of management should be compatible.
- growth opportunity – the alliance by its very nature should create opportunities for positioning your company and its alliance partners in a leadership or growth condition to sell a new product or service or to secure access to technology or services. This typically will create an excellent reward/risk ratio
- sharp focus – alliances with specific, concrete objectives, timetables, clear lines of responsibility, and measurable results are best positioned for potential success
- commitment and support – there must be a corporate alignment at the enterprise and sector levels. All management and leadership levels must ensure that the proper attitude filters down throughout the organization. Middle management’s support and involvement are vital, because “people support what they help create.” Further, support must be backed up by the commitment of resources necessary to get the job done
The GE/McKinsey Matrix identifies the optimum business portfolio as one that fits perfectly to the company’s strengths and helps to exploit the most attractive industry sectors or markets. The GE/McKinsey Matrix differs from other tools, like the Boston Consulting Group Matrix, in that multiple factors are used to define industry attractiveness. The vertical axis of the GE/McKinsey matrix is industry attractiveness, which is determined by factors such as the following: market growth rate, market size, demand variability, industry profitability, industry rivalry, global opportunities and macro-environmental factors. Thus, an industry should be represented as a combination of these external factors in order to be evaluated using GE/McKinsey matrix.
For example, a competitor wishing to gain competitive intelligence on the activities of Apple Inc. could do so by placing its business units into a GE/McKinsey Matrix. By analyzing this matrix, one could determine which business units Apple is likely to invest in heavily, develop selectively, or divest. The market attractiveness axis would be relatively easy for the competitor to assess if it is currently operating in that market, since this consists of factors external to Apple. This includes easily obtainable information such as the current market size and market growth rate. However, some factors would have to be assessed subjectively, such as barriers to entry and the state of technological development. From an assessment of Apple’s GE/McKinsey Matrix, it becomes clear that Apple competes in a number of attractive and fast-growing segments, such as tablet computers and smartphones. A competitor performing this analysis would realize that Apple is unlikely to divest any of these business units and is likely using its personal computer and music products as cash cows in order to fund R&D and growth in the faster-growing markets.
Industry attractiveness actually forms part of industry structure. The elements of industry structure which constitute industry attractiveness are industry potential, industry growth, industry profitability, likely future pattern of the industry, industry barriers and forces shaping competition in the industry. Industry Attractiveness = Attractiveness Factor 1 Value by Factor 1 weighting + Attractiveness Factor 2 Value by Factor 2 weighting, etc (Carpenter & Sanders, 2009). Factors which might affect market attractiveness are technology development, distribution structure, market size and growth rate, market profitability, pricing trends, rivalry, overall risk of returns in the industry, entry barriers, opportunities for differentiating products and services, variability of demand and segmentation.
Resource allocation is
a major management activity that allows for strategy execution. In organizations that do not use a strategic-management approach to decision making, resource allocation is often based on political or personal factors. Strategic management enables resources to be allocated according to priorities established by annual objectives. All organizations have at least four types of resources that can be used to achieve desired objectives: financial resources, physical resources, human resources, and technological resources.
A number of factors commonly prohibit effective resource allocation, including an overprotection of resources, too great an emphasis on short-run financial criteria, organizational politics, vague strategy targets, a reluctance to take risks, and a lack of sufficient knowledge. Resource allocation is affected by such factors as objectives of the organization, managerial preferences (preferences of dominant strategists), internal policies and external influences (e.g. the interests of stakeholders).
Businesses may choose to globalize or operate in different countries in four distinct ways: through trade, investment, strategic alliances, and licensing or franchising. Companies may decide to trade tangible goods such as automobiles and electronics (merchandise exports and imports). Alternatively, companies may decide to trade intangible products such as financial or legal services (service exports and imports).
Companies may enter the global market through various kinds of international investments. Companies may choose to make foreign direct investments, which allow them to control companies and assets in other countries. In addition, companies may elect to make portfolio investments, by acquiring the stock of companies in other countries in order to gain control of these companies.
Another way companies tap into the global market is by forming strategic alliances with companies in other countries. While strategic alliances come in many forms, some enable each company to access the home market of the other and thereby market their products as being affiliated with the well-known host company. This method of international business also enables a company to bypass some of the difficulties associated with internationalization such as different political, regulatory, and social conditions. The home company can help the multinational company address and overcome these difficulties because it is accustomed to them.
Finally, companies may participate in the international market by either licensing or franchising. Licensing involves granting another company the right to use its brand names, trademarks, copyrights, or patents in exchange for royalty payments. Franchising, on the other hand, is when one company agrees to allow a company in another country to use its name and methods of operations in exchange for royalty payments.
Few companies can afford to ignore the presence of international competition. Firms that seem insulated and comfortable today may be vulnerable tomorrow; for example, foreign banks do not yet compete or operate in most of the United States. Before entering or expanding international operations, strategists need a good understanding of the political and decision-making processes in countries where their firm may conduct business. For example, republics that made up the former Soviet Union differ greatly in wealth, resources, language, and lifestyle.
More and more countries around the world are welcoming foreign investment and capital. As a result, labor markets have steadily become more international. East Asian countries have become market leaders in labor-intensive industries, Brazil offers abundant natural resources and rapidly developing markets, and Germany offers skilled labor and technology. The drive to improve the efficiency of global business operations is leading to greater functional specialization. This is not limited to a search for the familiar low cost labor in Latin America or Asia. Other considerations include the cost of energy, availability of resources, inflation rates, existing tax rates, and the nature of trade regulations.
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