Strategic Models
INTRODUCTION
Strategic analysis is an organizational approach that involves looking at the things happening around the organization in the present and in the future in order to establish how the things that are happening are affecting the organization and the response that should be taken to manage changes (Bradford, 2000). It is labelled strategic because it is a high level approach that focuses on the long term factors in an organization and also looks at the whole organization. It is given the name analysis because it involves breaking a complex thing into chunks that are easily manageable. Strategic planning is an organizational process of defining the strategy or direction of an organization leading to decision making that will ensure that resources are allocated with a motive of moving towards a specific direction of pursuing a specific strategy. It is the official consideration of the future path of an organization by looking at things that need to be done, who to do the things and how to achieve excellence. Strategic planning is a visionary practice that tries to look at where an organization will be after a certain duration or period.
Thus, it is important to determine where an organization stands before you can know where it is going. There are various techniques or models that are used in strategic planning the first model focuses on the Strengths Weaknesses, Opportunities, and Threats (SWOT) analysis. The second one focuses on the Political Economic Social and Technological Economic and Legal factors (PESTEL). The third theory is called the Five Forces Theory that focuses on building a strategy to keep a business ahead of the following entrepreneurial influences potential entrants in the organization, buyers, suppliers, current competition and alternative products or services.
ORGANISATIONAL MODELS
SWOT analysis is a strategic planning model that is normally utilized to examine the strengths, the weaknesses, the opportunities and threats that are within an organization or an entrepreneurial venture (Bradford, 2000).Once the objective of an organization or an entrepreneurial venture has been specified, it is imperative to identify the favourable and the unfavourable external and internal that is critical in the achievement of the specified objective. The first element in a strategic plan is the strengths that an organization or a business venture possesses. Strengths are the attributes of an organization that can help it to achieve the set objectives. Strengths of an organization include things like, good access to networks of distribution, favourable access to high quality resources, a good reputation, powerful brand names and patents. Weaknesses are attributes of an organization that may be detrimental or may jeopardize the achievement of set objectives. When certain strength is lacking they can also be referred as weaknesses. Some of the common weaknesses that organization may have include A feeble brand name, increased costs of operation, lack of easy access to requisite materials, poor reputation and weak distribution channels. Opportunities are the outside factors that can help in the achievement of the set objectives. Possible opportunities include barrier removal, emerging customer needs, new technologies and flexible business regulations. Finally threats are the outside conditions that may derail the achievement of the set goals.
SWOT analysis model can be used by managers to solve organizational problems facing them by helping them to set attainable objectives, then utilize and capitalize on all the strengths of the organization, improve on the weak areas, ensure maximum benefit from each opportunity and minimize the effects of threats posed to the organization (Estelle. 1999). The most effective way of using SWOT is through a process called finding competitive advantage through matching that includes linking strengths to opportunities. During this process threats and weaknesses can be easily converted into opportunities and strengths, and this is more applicable in overcoming challenges faced in new markets. SWOT can also help in decision making especially in the making of strategic plans and visions. During this process, objectives that define what the organization wants to do are set before the internal SWOT of the organization is apprised and its operational portfolio assessed. The current strategies are then analyzed and their usefulness should be revealed by the appraisal done beforehand. This will help in the definition of strategic issues that will lead in the development of an organizational plan that the organization will follow. This may call for the maintenance of some old strategies and adoption of some other new strategies in order to start the implementation of the strategies by establishing the critical success factors of the organization. From there, project plans can be implemented and the results of the new projects monitored. Still in problem solving SWOT can help an organization to take a strategic position in the face of competition by helping the marketing department to create a profile of the competition in the market, by focusing and comparing their strengths and weaknesses (Fahey, 2000).
By comparing the cost structure of the companys competitors, their profit sources, strategic position, and level of integration vertically and their past responses to industrial influences, a marketer will be able to carry out quality market analysis that will help the organization to position itself strategically within the competition. The importance of SWOT can be seen in its role in management self assessment. The process may some times appear simple but the determination of strengths and opportunities versus threats and weaknesses is a complex task and making simple assumptions when making an assessment of SWOT components may lead to managerial delays especially in decision making where two or more strategic alternatives are concerned. The highlight SWOT as a strategic model is the opportunity it accords managers in development of strategic goals by helping them to focus on strength and take advantage of the opportunities.
PESTEL ANALYSIS
PESTEL analysis is a system of scanning the macro environmental factors in strategic management. The acronym PESTEL stands for Political, Economic, Social Technological Economic and Legal analysis (Estelle, 1999). It is a model that is commonly used in strategic analysis or when researching a market. It gives a sneak preview of the macro environmental influences that an organization has to consider and helps in understanding the growth or the decline of a market, the position of a business giving possible directions that will help in operations. In other words, it is a model of auditing the environment within which the business is operating with a view of using the information gotten to make strategic decisions assuming that a correct audit of the adjacent environment will position the organization better than its competition when it comes to dealing with environmental dynamics. There are two types of environments in which a business operates in. an environment which a business can do little to change or control it is called the meso-economic environment while the macro economic environment include the factors that have influence on the business organization. Understanding of these environments can help an organization to position itself strategically and capitalize on the opportunities they present and minimize the threats that are prevalent in themA PESTLE analysis is tool that assists in the comprehension of the bigger picture of the atmosphere in which a firm is operating. Importantly, a PESTLE analysis is vital in the understanding of risks connected with market the growth or decline of the market of the firms goods or services. It is commonly used for generic orientation therapy, checking when what is happening outside is affecting what is happening inside. Splitting the factors down one by one, political factors look at the levels of government intervention and interference in the economic set up. These political factors are things like the national tax regulations, laws concerning labour, environment and franchising, tariffs, subsidies, trade restrictions and the stability of the nation politically. The economic factors that come into play include the foreign currency exchange rates, levels of inflation, economic development and growth and prevailing interest rates. These factors influence business operations and economic decision making. Levels of inflation and interest rates usually affect capital costs which in turn influence the rate of growth and expansion of a business. Exchange rates usually affect the importexport elements of a business. The social factors in strategic management include issues like demographics, age set ups, career preferences, health issues and safety. Demand and supply is usually affected by social factors thus the dynamics of a business. Career preferences may affect the cost of acquiring labour while high poverty rates may have an impact on demand, just like low population. The rapidly changing technology environment may also have an impact on businesses. Technological dynamics can influence capital costs, quality of outputs and innovativeness. Technological factors also encompass ecological and environmental issues like automation and RD activity. Environmental factors affecting strategic planning are things like weather and climate patterns that have direct influence on key areas like agriculture, tourism and insurance. Finally, the legal factors tackled by the model include laws concerning discrimination, consumerism, antitrust issues, employment and safety that can also affect how a business operates.
PESTLE analysis is mainly applicable in entrepreneurship, marketing and strategic planning, change in organizational structure, development of business, product and services and in making research reports (Lusch, 1987). Its perspective of usage can be either departmental or individual. Its effectiveness depends on the regularity at which the PESTLE model is used. Doing regular and systematic analyses often identifies trends before the competition which enables an organization to have advantage while competing A PESTLE model is vital at the commencement of the process of business planning. It usually provides managers with basic and contextual data concerning growth goals, development of new products and positioning of the brands. Opportunities and threats the model can point out can be put in the SWOT model in order to mitigate threats and maximize on opportunities. The model can also be used for marketing planning.
CASE STUDY
Below is a PESTLE analysis of a company that manufactures soft drinks at the findings stage.
Political In the manufacturing industry the government is a key player when it comes to making and effecting laws and regulations. If the set regulatory standards are not met, fines are imposed by the government and the government can make the results of a company to differ with the one the company had projected in the following ways Changing laws especially on accounting, revision of tax rates and domestics and foreign trade regulations, interference with the pricing methodologies, infrastructural development that affects penetration of markets and its policies that dictate the political atmosphere in a country. When there is any disturbance of peace, sales automatically go down thus affecting the strategic plan of the company (Brian, 2000).
Economic Economic factors that affect business were evident in the year 2008 during the global recession. How would this affect this soft drink manufacturer The purchasing power of the consumer goes down due to inflation while the cost of operation and raw materials go up leading to the shrinking of the profit margin, but when the economy is booming, the company will take advantage of the low interest rates to borrow and carry out research which will reduce the costs.Sociological the recent trends in health watching by people is a boon for the soft drink industry because health concerns have made most people to switch from alcohol consumption to energy and dietary drinks and bottled water. This will affect the strategic plans of soft drink manufacturers positively.
Technological The new advertising technology that is attractive will definitely have a positive impact on the marketing of the companys products. The new design of cans that hold drinks is consumer-friendly which in turn increases sales. The rate of production of drinks will also be boosted by the emerging manufacturing technologies that can ensure mass production of quality drinks.
Legal Laws concerning chemical contents in soft drinks will come into effect soon meaning that soft drink manufacturers must be ready to comply or face the wrath of the law. This is another drawback for the manufacturers (Brian, 2000).
PORTER VALUE CHAIN ANALYSIS
Value chain analysis is a series of activities through which products go through as they gain value (Patrick, 1993). It is assumed that the chain of activities add more value to a product all the activities combined together. In value chain, the activities that add generic value are usually categorized. There are primary activities like incoming logistics, outgoing logistics, production, demand and maintenance marketing. Each value chain activity has its own costs and value drivers. Value chain is a very important tool for strategic planning though it was somehow simplified into a concept called value streams. Value chain analysis not only works for firm but also for distribution networks and chains of supply. The combination of products and services that are delivered to the final consumer will motivate a variety of economic influences which manage their own value chains. An extended value chain can be created by interlinked relations between various local chains. The interlinked value chains are usually referred to as value systems. A value system consists of the chain values of the suppliers of a firm, the very firm, its channels of distribution and its consumers. Most managers are keen to capture the value that has been accumulated in the course of the chain as a strategic plan. New business models can be created through a change of strategic plans whereby the upside and the downsides information is utilized to by pass some stages in the value chain (Naisbitt, 1999).Primary value chain activities create a value that is more than the cost of the production or provision of a service in order to create higher profit margin. Inbound logistics include inventory of inputs, reception of goods and ware housing. Operations or production is activity that crates value in the inputs to make the final item or product. Outbound logistics are the processes through which the final product gets to the consumer while marketing and sales involve persuasion of the consumer to purchase the product. Advertising is an integral part of this process. The aforementioned activities are important in the development of competitive advantage for a certain firm. There are also some generic activities that are also vital in securing firms competitive advantage. Support activities that are generic include procurement or purchase of the requisite raw materials to be used in the process of creating value. Technology development, automation and other support mechanisms that are used to enhance the value chain, and then there is the management of human resources activities that include recruitment of labour force while Fiscal infrastructural set up includes the financial and the legal aspects. Value chains are very vital when making decisions concerning outsourcing creating a cost or differentiation advantage (Brian, 2000).
STRENGTHS AND WEAKNESS OF THE VALUE CHAIN
Looking at the strengths and weaknesses of the value chain, it is important to look at the strengths and weaknesses of the five factors in the value chain that are incoming logistics, outgoing logistics, production, demand and maintenance marketing. The major strength of incoming logistics as the first factor in value chain is that it creates a likelihood of the consumers using the substitute or the alternative is very high especially if the substitute is lowly priced or there is a seen differentiation level. The elasticity of a product is mainly affected by the availability of alternatives that cannot be affected by the incoming logistics. However, this can lead to war of prices between firms with related products. This problem is prevalent among mobile phone and pay TV providers. The weakness of incoming logistics is that threat can come from products outside the industry. For example, marketing of aluminium cans for beverages is limited by the availability of plastic and glass alternatives. Tire retread companies affect the business of tire manufacturers while cloth diapers that are sold at the same price with the disposable ones are a competition for the disposable diapers. The second force in the value chain is the outgoing logistics whose major strength is the resistance that it gives to the new entrants to the industry thus creating a competitive advantage for the company. In a profitable market, many players will be drawn into it. New entrants will affect profitability of the original players because of the increased competition. When a company that has been enjoying a monopoly is joined by another providing the same services or selling the same products, the profitability will not remain the same because a chunk of the market share will be eaten by the new entrant. This is what happened in Africa when a Kenyan based mobile provider, Safaricom had its share of the market taken by two new entrants within a year. Its record breaking profit margins tumbled within the same year. Some companies in a lucrative market create what is known as barrier to entry to purposely keep off new entrants. The major weakness of outgoing logistics is that companies lower prices to a level which new entrants would find it hard to make profits then raise their prices when the looming competition is completely discouraged and loses interest in the target market.
The third force is production which creates rivalry between the various producers. The major strength of production is that if a company has a competitive advantage over fellow producers, it can control discipline in the market. The market is said to be disciplined if the rivalry between competitors is low, but the drive to seek competitive advantage can disrupt a disciplined market. Rivalry heightens when a firm acts in a way that is bound to bring out a counter response from its competitors. When trying to gain advantage over rivals, a firm can lower prices, improve its products, create different disruptive brands, and establish new channels of distribution in order to disrupt the market. There are different factors that intensify rivalries. The weakness of production as a force in the value chain is that a rise in firms doing the same business can slow growth of market, increase in fixed costs, low cost of switching, reduced levels of differentiation of products and strategic stakes that are high. The other force in the value chain is demand. The strength of demand is in the ability of customers to put a company under pressure. This is also referred to as buyer power and this is what controls demand of goods that a company produces. When there is strong buyer power, the buyer is the one who sets the price because this situation means that there are many suppliers and fewer buyers. This scenario is called monopsony. The weakness in demand comes when those people or companies that supply a firm with raw materials affects the demand through their erratic supply of raw materials. This may place unrealistic demands on the firm thus affecting its operations (Roger, 1995).
In product development, the model can give an insight of what is happening in the outside world helping in decision making that will lead to market a certain product in a particular place or remove a certain product from a certain environment. When conducting change in the organizational structure, this model will help in the comprehension of areas that deserve change especially on the labour division. The model can also be used to look at the outer world to forecast the things that might happen in the future which may have an effect on the business making sure that nothing is ignored. This will surely help the managers in making decisions on how to handle future outcomes.
The other strength of maintenance marketing is that they can be used by businesses to gain competitive advantage. The first generic strategy is called the strategic scope which is based on demand, looking at the size and content of the target market. Strategic strength is based on supply looking at the central competencies of the firms. Research indicates that firms with a high share in the market are usually very profitable and so are firms with low market share meaning that the firms with moderate market share are usually the least profitable ones (Lorenzo, 2006 ). This situation is commonly referred to as a hole in the middle. Firms with a high market share usually adopt a strategy called cost leadership while those with low market use what is called segmentation of market to concentrate on a small but profitable chunk of the market. The main weakness here is that the ones in the middle lag behind because of lack of a generic strategy that is viable. For a business, the most important and viable method is that of combining a variety of strategies like segmentation of market with differentiation of products to match the supply side of strategy of products to the demand side of segmentation of markets. Some combinations are hard to achieve like cost leadership and differentiation of product because there is likely to be a conflict between minimization of costs and the increased value added cost. However, strategies that are cheap cost wise can never manage to give a competitive advantage that is sustainable. The weakness maintenance marketing as a force in the value chain is that a wide market entails creations of a universally unique product or service which is charged at a premium rate. The premium rate is special because the image of the brand, technological features, operations and design is unique. This differentiation is very strong as an approach because the returns are more than average and brand loyalty is achieved thus reducing the sensitivity of consumers to price. In this model, rising costs can be always transferred to the customers. The other weakness is that loyalty created among buyers can also be used as an entry barrier to firms that may want to venture into a similar business. For those new firms to be able to compete favourably they must differentiate their products in a distinctive manner. There are several variants when it comes to differentiation strategy. The first one is called the shareholder value model which postulates that unique knowledge that is specialized can create an advantage for differentiation if it is well timed. The second one is called the model of unlimited resources that uses a big pool of resources which permits a firm to last longer than its rivals when it practices a strategy of differentiation (Michael Jude, 2005).
The strength of the value chain as a whole is that it utilizes a large base of resources that allow organizations to outlast competitors by practicing a differentiation strategy. Firms with more resources can conduct risk management without sustaining massive losses than a firm with few resources but the advantages enjoyed are not long lasting because if innovation is not continual, then it may lose its competitive position as time goes by. The other strength is that, a firm focuses on a small number of target markets thus qualifying to be called the segmentation approach. Focusing on firms effort of some few selected markets helps in specialization that will help in better comprehension of what that market requires. In this case, brand marketing and innovation rather than efficient operation is what helps a firm to gain the competitive advantage it has been continually seeking. This is viable for emerging firms though established ones can also use them. This strategy should concentrate on the segments of markets that are less susceptible to prevalence of substitutes or where the level of competition is at weakest.
Michael E porter further developed a framework mainly geared towards industrial analysis and development that was a combination of the value chain and the five forces model. This model utilizes elements of organizational economics of industries to come up with five forces that underline the intensity of the competition and the profitability of the market in connection with the value chain. The strength of the forces is that they are very central to the firm and any slight dynamics in any of the force will call for the re assessment of the firms place in the market. This model is commonly used by strategic experts to qualitatively examine the strategic position of a company, but it is only used in the initial stages. Three of the five forces in this model are labelled the horizontal competition. These include the threat posed by products that can substitute a firms product, the threat of rivals who are well established and the threat of greenhorns. Two forces that are labelled a vertical competition include the suppliers power of bargaining and that of customers.
When it comes to corporate planning, the best models are the SWOT and PESTEL. The two models can be used together to analyze a business and its environment. After the definition of what the company wants to do, companys past and present SWOT can be scanned before the current strategies are analyzed do determine the relevance of the outcome of the SWOT. After that, the strategic issues that are major in the making of a corporate plan are defined so that strategies can be revised of removed. This will give way for the establishment of critical factors so that strategies can be implemented. At this point, the PESTEL analysis can be brought in so that the macro economic factors can also be scanned so as to be able to place the business strategically within its external and internal environment. Using this model can help managers to make a forecast of threats that may plague a business in the future leading them to take action that will definitely mitigate the impact. However, caution ought to be made while using this method because managers have fallen into temptations of using data that is not enough thus giving misleading results. Though access to data may consume a lot of time or face challenges, data used must be enough to reflect the external and the internal condition of the company. SWOT analysis also ought to be undertaken regularly to enhance effectiveness. Using both models together can help a firm to launch strategic vision because a predictive element of the combination of the two can help managers to make future forecasts. They can also help the firm to take a competitive advantageous position that will enable it to survive in the competitive environment.
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