Business and Marketing: Models in Strategic Management

MODELS IN STRATEGIC MANAGEMENT

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Business and Marketing: Models in Strategic Management
Introduction
Decision making is the most important function that is performed by any manager in an organization. Strategic decision making on the other hand is the main function that is performed by senior management. In the course of making decisions managers are assisted by number of strategic management models that can be applied at different levels or in different kinds of situations usually faced by senior managers. (Azar Kazmi.2008, 14). In order to understand the concept, an explanation of decision making in the business sense is necessary. From a strategic management point of view, decision making can be described as the process of selecting a course of action from among a number of alternatives. The process of decision making involves a number of aspects. First, the objectives that are desired have to be determined. Second, alternative ways through which the objectives can be achieved are then identified. Next, each of the alternatives is closely analyzed in terms of the ability to achieve the objective and finally from among the alternatives the best one is selected. (Pankaj Ghemawat 2001. 22)
The end result of the process is a decision that is to be implemented. While the process might appear to be simple, the actual practice of decision making is a highly complex phenomenon. This is due to the fact that at each stage of the decision making process, problems are likely to be encountered. Thus carrying out decision making at a strategic level is an extremely difficult and complicated process. Another fact that makes the process more critical is that this decision making is what determines most aspects of strategy formulation. Examples of such a scenario would be determining what environmental opportunities and threats to focus on and determining where exactly to allocate resources from a number of alternatives.
Globalization, rising complexity of doing business, increased competition and access to a wide variety of information are some of the factors that have pushed managers towards looking for strategic models that could help them in their managerial decision making. This is necessary due to increased pressure to gain competitor advantage over rival firms, increase shareholders wealth and to keep on enhancing the profitability of their organizations. While some of these models may at times happen to be passing fads or trends, some have of them are proven over time and they remain solid ideas worth considering and applying widely to many different situations in the management context. (Lamb, Robert, and Boyden.1984. 67).The usage of these strategic models has attracted the attention of management thinkers and researchers who have conducted studies on the use of these models at a global level.
This paper tries to examine the models of strategic management and their contributions in decision making at the organizational level. Some of the models described include Porter’s generic strategies, the BCG matrix, and the GE matrix. The paper also explains in detail the PESTEL analysis and finally analyses its strengths and weaknesses.
Models in strategic management.
There are myriad models available to assist in strategic planning or decision making. Some of these models would include:
GE Nine cell matrix
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This model is commonly used for corporate portfolio analysis. It is based on the pioneering efforts of General Electric Company in the United States supported by the consulting firm known as McKinsey & company. The vertical axis represents industry attractiveness which is weighed based on eight different factors. These factors are market size, market growth rate, industry profit margin, competitive intensity, seasonality, cyclicality, economies of scale, technology, and social, environmental, legal and human impacts. The horizontal axis represents business strength competitive position which is based on seven factors: The relative market share, profit margins, ability to compete on price and quality, also the knowledge of customer and market, competitive strengths and weaknesses, caliber of management and technological capability. The nine cells of GE matrix are grouped on the basis of low to high industry attractiveness and weak to strong business strength. Different cells are denoted by different colors that signify which strategy to adopt (Mintzberg, Lampel, Ahlstrand 1998. 27).
BCG Matrix
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Companies that are big in size with several strategic business units face a major dilemma when it comes to the allocating of resources to those units. The Boston Consulting Group developed a model that would assist in the allocation of resources to strategic business units. In order to ensure long term value creation an organization should have a portfolio that contains both cash generating low growth products and high growth products that require investments in the form of cash inputs. Resources are allocated to the business units based on where they lie in the grid. A cash cow, this is a unit that is situated in a in an industry that is growing slowly.
The cash cow has a large market share in that industry and it generates a lot of cash for the business. A star on the hand is a business unit that has a large market share in a fast growing industry. While it might generate cash, the fact that it is growing company means that it need cash inputs from the organization in order to grow further or to sustain its position. A question mark is a business unit that holds only a small market share in a high growth industry.
Units in this position require regular resources in order to grow. A dog is a unit that has a small market share in an industry that is mature. Dogs tend to tie up capital and resources that could be invested elsewhere. The best way to deal with such units is to liquidate them. (Fleisher and Bensoussan 2002. 57)
SWOT Analysis
Almost all organizations in a variety face competition, indirectly or directly. Thus the industry and competition present become vital factors to consider when making a strategic decision. The industry serves as a context or a background in which a company operates while competitors on the other hand vie for the same set of customers by offering similar or identical products at a competitive price. Thus it becomes imperative that for any decision to be taken the two factors of industry and competitors have to be carefully analyzed. Also the internal environment of the firm has to be evaluated in order to determine the inherent strengths or weaknesses that could hinder or enhance competitive ability and success.
SWOT analysis serves as a model that is popularly used to analyze the external and internal forces of a firm in order to aid in strategic decision making. The main function of this tool is to access the opportunities, threats, strengths and weaknesses that are relevant to a particular organization. (Mulcaster.2009, 67)
Porter’s five forces model.
Another very popular model is Michael porter's five forces model. This model is very relevant in the case of formulating of competitive strategies. The model advocates for a careful analysis of industries so that a firm is in a better position to identify its strengths and weaknesses. The basis for the model is five competitor forces: the threat of new entrants in a market, bargaining power of buyers, rivalry among competitors, bargaining power of suppliers and the threat of substitute products. According to this model, these are the five forces that determine competition and profitability in an industry (Porter, 1985)
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Can managers use models to improve decision making?
Some of the ways through which strategic management models could assist managers to improve decision making include: better perception of critical success factors and distinctive competence factors. The other factor is that strategic models aid in the formation of a strategic plan.
Perception of critical success factors and distinctive competencies
Critical success factors and distinctive competencies are very important issues when doing environmental and organizational appraisal. How they are perceived by managers makes them very important factors in strategic decision making. While considering several alternatives managers could use strategic models to identify the distinctive competencies that the organization possesses. The same models could also be used to identify the critical success factors that determine success in the industry in which the organization operates.
After identification of these two factors with a strategic model as a guide, the manager can then formulate a decision that aims at using the distinctive competencies to build a strategy around the critical success factors. This is likely to lead to success. For example if the critical success factors in an industry are low cost production, quality of after sales service and constant supply of raw materials. Then a manager could use SWOT analysis to evaluate the company based on this factors and in the process be able to conclude whether it possesses significant strengths in these areas or not. If it does then the manager could make the decision to enter into that industry in a strategic manner. If the company does not posses these alternatives then the manager will have to look at other alternatives. In this way SWOT analysis which is a model in strategic management can be used to guide and aid managerial decision making. (Hamel, Prahalad, May 1990. 8)
Strategic plan
A strategic plan is a document which provides information regarding the different elements of strategic management and the manner in which an organization and its strategists propose to put the strategies into action. Most managers use strategic models as a guide for preparing a strategic plan. Various models of strategic analysis are used to determine the components of a strategic plan. Some of these components include: results of organizational appraisal, major strengths and weaknesses and core competencies. A swot analysis could be used to determine these factors.
Another component of such a plan would be strategies that have been selected for implementation and the assumptions under which those strategies will be relevant. Again here a number of models could be used to determine which strategies to use. Another component of a strategic analysis is the results of an environmental appraisal, major opportunities, strengths, weaknesses and core competencies. Here a SWOT analysis would be relevant.
Model description - PESTEL analysis.
The History of PEST dates back to the last 10+ years ago but its true history cannot be traced easily. Research shows that the earliest known reference to tools and techniques for ‘Scanning the Business Environment’ appears to be by Francis J. Aguilar (1967) who discusses ‘ETPS’ - a mnemonic for the four sectors of his taxonomy of the environment: Economic, Technical, Political, and Social.Shortly after its publication, Arnold Brown for the Institute of Life Insurance (in the US) reorganized it as ‘STEP’ (Strategic Trend Evaluation Process) as a way to organize the results of his environmental scanning.
Thereafter, this ‘macro external environment analysis’, or ‘environmental scanning for change’, was modified yet again to become a so-called STEPE analysis (the Social, Technical, Economic, Political, and Ecological taxonomies). In the 1980s, several other authors including Fahey, Narayanan, Morrison, Renfro, Boucher, Mecca and Porter included variations of the taxonomy classifications in a variety of orders: PEST, PESTLE, STEEPLE etc. Why the slightly negative connotations of PEST have proven to be more popular than STEP is not known. There is no implied order or priority in any of the formats.
Some purists claim that STEP or PEST still contain headings which are appropriate for all situations, other claim that the additional breakdown of some factors to help individuals and teams undertaking an environmental scan.
PEST analysis stands for “Political, Economic, Social and technology analysis”. It describes a framework of macro environmental factors used in the environmental scanning component of strategic management.
This type of analysis is a component of external analysis required when conducting market research and strategic analysis as it gives a clear overview of the different environmental aspects the company has to consider before making any decision. PEST analysis undoubtedly is an important tool that can assist managers to understand the nature of markets, position and potential of a business and the direction for operations.
With the increased need to conserve the environment, analysts have come up with an updated version which considers Socio-cultural, Technological, Economic, Ecological and Regulatory factors hence STEER analysis. This type of analysis comes before SWOT analysis as it helps to identify SWOT factors although there is an overlap between PEST and SWOT factors but the two are completely different perspectives.
PEST assesses a market, including competitors, from the standpoint of a particular proposition or a business while SWOT is an assessment of a business or a proposition, whether you’re own or a competitor's. Also the usefulness of a PEST proposition is dependent on the size and complexity of the business or proposition (Turner, 2002, pp 161). Use of PEST analysis for very small local businesses will ensure that no detail is left out however small they might be. The P...