Strategic Management and Policy by Porter - Assignment Example

Strategic Management & Policy Name: Class: Unit: Section A: Compulsory Essay Question (total 26 marks). Question 1 (26 marks; 1,400 words maximum) Porter’s work has contributed in a great way to the attainment of a sustainable competitive advantage. Based on the four frameworks, it is clear that the strategic goal of a business is to attain a competitive advantage to its rivals. Through attaining a competitive advantage, a firm is able to earn higher profits compared to the competitors in the same industry. While attaining a competitive advantage is important, sustaining it is a hard task (Porter, 1985). For a competitive advantage to be sustainable, it must be hard to duplicate or imitate by the competitors or the new firms entering the industry (Miller & Dess, 1993). Apple computers have been able to utilise strategic management to attain sustainable competitive advantage, hence important in illustrating this discussion. In his first book on competitive strategy, Porter looked at industry analysis. This is through the five forces of competitive position model (Porter, 2008). The five forces have the ability to impact the industry profitability in a great way. First, there is always a threat of entry where new firms join in. In a free market, a firm should be able to enter the market and exit freely. In this case, the profits are always on the leverage. Despite this, some industries possesses barriers to entry which makes it hard for a new firm to join. The characteristic helps in protecting the high profit levels in the industry. When the industry is doing well, it is expected that new firms will join in and take advantage of the high profits. This over the time erodes the industry profits and the firms’ starts exiting the market hence restoring the market equilibrium. Barriers to entry occur when there is patented technology, high brand loyalty, few distribution channels and high production (Porter, 2008). According to the porters model, threat of substitutes occurs when demand is impacted by the price change of the substitutes. Substitutes in this case refer to the products offered by other industries which can meet similar customer needs (Miller & Dess, 1993). The industry is also impacted by the power of the buyers. These are the impacts that the customers have on a given industry. When the buyers have strong powers, they may lead to monopsony. In this case, the buyer has the ability to set the price. Suppliers can also have an influence on the industry. This is through the sale of the raw materials where setting high prices have an impact on the profits. A disciplined industry has a low rivalry among firms. The discipline can be associated with the existing level of industry competition, role played by the leading firm and the informal compliance (Porter, 2008). Apple computers are in a market that is dominated by five main companies. The companies are Dell, HP, IBM and Compaq. The dominant players in the industry increase the barrier of entry for the new firms. The industry is also capital intensive, involves patents and copyrights and in the maturity stage. This also reduces chances of new entrants. The threat of substitutes is considerably low. This is due to the Apple PC being able to perform a lot of functions taking them away from the substitute products. The threat from substitutes is very weak in this industry. For Apple computers, the bargaining powers of the suppliers are moderate. The firm has been able to hold power over those supplying them, which have led to a competitive advantage. The buyers in this case have strong bargaining power. Consumers have been pressuring the firm to make sure that they differentiate their products and ensure they are innovative. Apple is among the firms that have been working hard to satisfy their customers demand through innovation. There is high rivalry in the market among the main competitors. This includes Apple, IBM, Compaq, HP and Dell. With severe price based competition, Apple has maintained sales through maintaining premium prices for their products. The industry is expected to remain highly competitive as it expands. Through Porter generic level strategies, an organisation can attain a competitive advantage in a given market. The generic strategies according to porter are cost leadership, differentiation, and focus (Porter, 1996). Through porter generic strategies, a firm is able to attain a competitive advantage. This is through attaining an edge that makes it possible to get ahead of the competitors. A firm can attain cost leadership strategy through increasing profits and reducing the costs. This also involves ensuring that the prices charged are industry level. The second way is by increasing the existing market share. This is through charging lower prices and making some profits (Dess & Davis, 1984). The differentiation strategy is based on ensuring that one’s products and services are different from those being offered by the competitors. It involves being able to stay agile when developing new products. Through focus strategy firms concentrates on a specific market niche. This is through having an understanding of the market dynamics and the customer needs in a given niche. Through serving the niche well, it becomes possible to create brand loyalty (Porter, 1996). In this case, it is apparent that Apple has taken a differentiation strategy. This is through ensuring that their products are different from those of the competitors. Apple comes up with unique design and products such as iMac, iPad and iPod, which has differentiated them from the competitors giving them an upper hand. Through focus strategy, Apple has been able to concentrate on the premium niche of the market. Most of the apple products are highly priced hence targeting the rich niche. Through serving this niche well, the firm has been able to gain brand loyalty (Finkle & Mallin, 2010). The Porter value chain is based on the process view of an organisation. It involves looking at the organisation as a complete system which is made of subsystems. The way in which the value chain activities are implemented determines the costs and profits. Organisations engage in a lot of activities while converting their inputs to outputs. In the process, the value that is created can be described as the profit margin. A firm which is able to create more value is highly profitable. When a firm is able to provide more value to their customers, they are able to create a competitive advantage. The manner in which the value chain activities determines the costs incurred and ability to make profits. Porter value chain has proved to be an important strategic management tool. This is through breaking an organisation into pieces based on the relevance so that one can see the full picture on the cost drivers and the main sources for differentiation. This helps the organisation to gain a competitive advantage (Porter, 1985). Apple success in attaining a competitive advantage can be tied up to its value chain management. This is a firm that has been able to create more value to their customers hence attaining a competitive advantage. Through excellent management of the value chain, Apple computers have been able to reduce their costs incurred and maximise profits (Finkle & Mallin, 2010). According to Porter, (1990), the nation competitive advantage depends on its ability to be innovative and continuous upgrade. Firms are able to gain a competitive advantage through pressure and challenge. The firms are able to benefit from having to face strong rivals in the domestic market and customers who are more demanding. Through a highly localised process, it becomes possible for the firm to gain a competitive advantage. In addition, firms are able to attain competitive advantage through innovation. This includes the use of modern technologies and doing things in a different way (Porter, 1990). An example is Apple Computers who have gained competitive advantage through innovation. Apple Computers have been able to find new ways of competing through innovation. This is based on the product design, new marketing approach and unique products. These innovations have created a competitive advantage that has not been perceived before. Innovations that are able to lead to a competitive advantage are able to anticipate both domestic and foreign market needs. The global electronics industry in which Apple PC is involved in is highly competitive. This is with the manufacturers coming up with least expensive and highly efficient electronics in the markets. Apple computers have used innovation, differentiation to stay ahead of their competitors (Finkle & Mallin, 2010). Section B: Compulsory Short Answer Questions Question 2. (10 marks; maximum 500 words) Boston Consulting Group (BCG) growth share matrix is able to display the various business units in graphs based on the market growth versus the market share compared to the competitors. In this case, it becomes possible to allocate the business units based on their locations on the grid (Hax & Majluf, 1983). The grid is able to divide the units as cash cows, star, question mark or dog. The cash cow is the business unit which has a large market share and in a mature industry. In the case of west-farmers, this is Coles. This seems to be the main business unit generating most of the revenue. This is followed by the Home improvement. Coles in this case has revenue of 39,242 million dollars while home improvement has 11,571 million dollars. The star is a business unit that is based on a fast growing industry. This is a unit which may generate cash, but requires investment to maintain their lead. Star becomes a cash cow in case the industry matures. In the case of West farmers, it seems that Department Stores are the star. This is due to the fast growth of the department stores sector as the section nears maturity. A question mark is a business unit that is in a high growing market, but has a small market share. Despite high resources used, these business unit ability to become stars is unknown (Morrison & Wensley, 1991). A business unit such as industrials has low revenue despite being in a fast growing industry. A dog is a business unit which ties revenue that can be used elsewhere. It has a small market share in a mature market. In the Westfarmers report, this can be illustrated by Office works. The unit has the lowest revenue despite being in a fast growing market segment (Wesfarmers, 2016). BCG has proved to be very useful when analysing multi-category firms such as Westfarmers. It is important to note that various business entities moves with varying pace and with different strategies (Hax & Majluf, 1983). Through the use of BCG, it becomes possible to determine which business portfolios are profitable and which are not. This helps in determining areas in which the business should concentrate on. In addition, the firm is able to get a holistic view on which units should be divested and which to continue. This helps in determining on which units can give more income and better investment. It becomes possible to determine the market growth rate through looking at both product growth rate and the industry growth rate. Through considering growth rate and market share, one is able to gain an overview of the competition in the industry. It also becomes possible to gain idea on what might impact the product in future. The recommended strategies gained from BCG help in determining the right action to implement (Morrison & Wensley, 1991). Question 3. (5 marks; maximum 150 words) The airlines wanted to consolidate their strengths to enhance their competitive positions (Harvard Business Review, 2016). Strategic alliance between airlines makes it possible for them to consolidate their strengths (Chang & Hsu, 2005). Through the alliances, the airlines were able to strengthen their member base. Sharing the networks was another reason for the strategic alliance. Through strategic alliances, it was possible for Qantas to have the ability of sharing the emirates network located in the Middle East Africa and Europe. It was also possible for the Emirates to access a larger market share in Australia which was controlled by Qantas. Emirates accessed the 8.6 million frequent flyer members from Qantas including their points. Qantas had been facing challenges due to high fuel costs and increased competition from the Middle East and Asia. Through strategic alliances, it was aimed that some of these challenges would be eased (Mules, 2013). Question 4. (5 marks; maximum 150 words) Corporate governance lowers the amount of risk involved in an organisation. Through use of corporate governance programs, an organisation is able to prevent and avoid fraud, scandals and criminal activities in an organisation. In addition, it makes it possible for the people in an organisation to know their responsibilities. Secondly, corporate governance program leads to public acceptance. This is due to the associated disclosure and transparency associated with corporate governance leading to high level of public trust and lowering the chances of fraud (Jiang & Kim, 2015). Thirdly, corporate governance programs lead to a positive public image. The corporation is able to take more responsibilities for their actions and understands what the public wants. Lastly, corporate governance programs makes it possible to come up with better decisions. This is due to fact that corporation knows what it is accountable for. Accountability assists in the decision making process (Schillaci, Romano & Longo, 2011). Question 5. (6 marks; maximum 300 words) a) Incentives and basic benefits that influence firms to use international strategies (3 marks) Through the use of an international strategy, a firm is able to sell their products away from their domestic market. There are several incentives that influence a firm decision to use the international strategy. The first incentive is demand driven where the firm sees the new market as a way of expanding their product lifecycle (Hitt, Franklin & Zhu 2006). Use of international strategy may also be driven by the need to gain access to materials and resources. A resource driven incentive can be explained through a firm such as Rio Tinto expansion into countries such as Mongolia. Firms can also adopt an international strategy with an aim of integration of their operations on a global scale. This includes firms such as McDonalds and IKEA whose expansion has been motivated by the integration of their operations. Another incentive is tech driven. This is where a firm wants to use the fast developing technologies. Lastly, the emerging markets are incentives since they offer new opportunities. The basic benefits accrued by international strategy are an increase in the market size, economies of scale and location advantages (Ricart et al., 2004). b) Multi-domestic strategy (3 marks). Multi-domestic strategies involve having the strategy and operating decisions being decentralised to the strategic business units (Roth, Schweiger & Morrison, 1991). In this case, the firms ensure that the products and services are all tailored to meet the local markets. In each of the country, the strategy ensures that the business units are very independent of each other. An example is McDonald where each of the market is treated differently based on the country. McDonalds ensures that their menu is based on the local market and country culture. This strategy has helped the firm due to the variety of cultures in its markets (Hitt, Franklin & Zhu, 2006). The competition is focused on the market environment where they are operating. Question 6. (8 marks; maximum 300 words) a) Explain three (3) key drivers of mergers and acquisitions. (3 marks) Mergers and acquisitions have been driven by various facts. The first key driver is increasing the market power. To increase the market power, firms mergers with another which has an already established customer base. An example is the acquisition of Vodafone by Verizon. Secondly, M&A are driven by the need to overcome entry barriers. This can occur in cross border acquisitions or in home market to overcome the existing entry barriers. This can be explained by the merger between Glaxo Wellcome and SmithKline Beecham (Heracleous & Murray, 2001). Lastly, another key driver is learning and developing new capabilities. This is where the acquiring firm aims at learning new capabilities which they do not possess. This acts as an access to complementary capabilities to build on the existing knowledge base (Haleblian et al., 2009). b) Discuss the factors that contribute to a successful merger or acquisition and illustrate your discussion with relevant examples. (5 marks) For a successful M&A, the firms involved should have complementary resources. This leads to synergy and a competitive advantage (McCann, 1988). This can be illustrated by the merger between Glaxo Wellcome and SmithKline Beecham, which led to maintenance of strength and synergy. M&A should be carried out in a friendly manner to ensure that there is effective integration. Before engaging in an M&A, there is a need for the firms to conduct due diligence in establishing the target firm health. This has also been proved by Glaxo Wellcome and SmithKline Beecham merger where the firms complemented each other and there was no overpayment. It is important to ensure that the firms involved have favourable debt positions to ensure there is easier financing. Low to moderate debt positions makes it possible to avoid tradeoffs and the risk of bankruptcy. To sum up, it is important to ensure that the acquiring firm is capable of managing change, flexible and adaptable. This ensures that there is highly effective integration and synergy is attained (Epstein, 2004). References Chang, Y. C., & Hsu, C. J. (2005). Ally or merge: Airline strategies after the relaxation of ownership rules. In Proceedings of the Eastern Asia Society for Transportation Studies, Vol. 5, pp. 545-556. Dess, G. G., & Davis, P. S. (1984). Porter's (1980) generic strategies as determinants of strategic group membership and organizational performance. Academy of Management journal, 27(3): 467-488. Epstein, M. J. (2004). The drivers of success in post-merger integration. Organizational dynamics, 33(2): 174-189. Finkle, T. A., & Mallin, M. L. (2010). 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