Essential Strategic Business Frameworks
Porter’s Five Forces Model
1. Threat of New Entrants: New entrants may increase the intensity of competition in mature market situations. Rapid market expansion is possible and feasible during the introduction and growth stages. New entrants to an industry typically bring new capacity, a desire to gain market share, and substantial resources. They are, therefore, threats to established firms. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. An entry barrier is an obstruction that makes it difficult for a company to enter an industry.
2. Rivalry Among Existing Competitors: The degree of rivalry among different firms is a function of the number of competitors, industry growth rate, asset intensity, product differentiation, and exit barriers. The number of competitors and industry growth are the most influential factors. Industries with high fixed costs are likely to face price wars when the market stagnates or overcapacity becomes a regular phenomenon. Difficulties in exiting a business also intensify competition.
3. Threat of Substitute Products or Services: A substitute product is a product that appears to be different but may satisfy the same needs as another product; for example, the different brands of mineral water like Bisleri, Aquafina, and Kinley are all substitutes for each other.
4. Bargaining Power of Buyers: This refers to the ability of the industry’s customers to force down prices, bargain for higher quality or more services, and play competitors against each other. A buyer or group of buyers is powerful if:
- A buyer can resort to backward integration by producing the product.
5. Bargaining Power of Suppliers: Bargaining power of suppliers refers to a situation where suppliers can force buyers to pay higher prices and affect their profitability. This would happen when:
- Supplier enjoys a monopoly;
- Switching costs for buyers are high;
- Substitutes are not readily available, e.g., electricity.
BCG Matrix
1. Question Marks (Low Share, High Growth): These are new products with the potential for success but require significant cash infusion for fast growth. Companies must decide whether to continue investing in these Strategic Business Units (SBUs) or withdraw from the market. They are poor cash generators but have the potential to become Stars.
Strategy: Build/Harvest
Strategy Characteristics: The goal is to increase the SBU’s market share or short-term cash flows and eliminate research and development expenditure.
2. Stars (High Share, High Growth): Stars are market leaders. If Question Marks are successful, they can be converted into Stars. Stars generate significant cash flows but also face competitor attacks.
Strategy: Build
Strategy Characteristics: The aim is to increase the SBU’s market share.
3. Cash Cows (High Share, Low Growth): Cash Cows generate considerable cash flows in excess of their needs and are often “milked.” They benefit from economies of scale and typically have higher profit margins.
Strategy: Hold/Harvest
Strategy Characteristics: The focus is on preserving the SBU’s market share or increasing short-term cash flows, often by eliminating research and development expenditure.
4. Dogs (Low Share, Low Growth): Dogs generate low profits or losses and consume more management time.
Strategy: Maintenance, Harvesting, and Divesting
Strategy Characteristics:
- Maintenance Strategy: Firms hold or maintain their marketing mix effort at current expenditure levels.
- Harvesting Strategy: Firms reduce marketing expenditures while anticipating a less-than-proportional reduction in sales.
- Divesting Strategy: As the market continues to decline, it becomes necessary to remove the brand from the market completely, reducing the marketing mix to zero.
McKinsey 7-S Framework
Waterman, Peters, and Phillips (1980) suggested a model for organizational excellence that has become popularly known as the 7-S Framework. They found that the success of an organization depends on a number of supporting variables besides structure and strategy. They considered the following seven elements:
Strategy
It provides a broad framework for the allocation of a firm’s scarce resources to achieve desired goals.
Structure
It prescribes formal relationships, communication channels, roles to perform, and rules & procedures to manage. Structure has three important functions:
- Reduction of external uncertainty.
- Reduction in internal uncertainty due to variable, unpredictable, and random human behavior.
- Coordination among activities within the organization to enable a strategic focus.
System
It refers to the procedures, rules, and regulations that characterize how important work is to be done.
Style
The style of an organization becomes evident through the patterns of actions undertaken by top management over time. These decisions are also likely to influence people at lower levels of the organization.
Staff
Proper staffing ensures high-order human resource potential, which can contribute to the achievement of organizational goals. Two aspects are distinctly recognized in staffing:
- Selection of the right people for specific organizational positions.
- Developing abilities and skills in them so that they can effectively execute their present and future roles.
Skills
These refer to the distinctive attributes or capabilities of an organization.
Shared Values
These help members within an organization identify themselves as part of a whole journey. This is reflected in the values, attitudes, and philosophy of its members, which in turn builds the foundation for the organizational culture based on their own ideals and beliefs.
Strategic vs. Operational Control
This section outlines the key differences between Strategic Control and Operational Control:
Target
- Strategic Control (SC): Proactive probe of the intended direction of strategy.
- Operational Control (OC): Aimed at the allocation and use of organizational resources.
Concern
- Strategic Control (SC): Concerned with the future of the company and the course being undertaken.
- Operational Control (OC): Concerned with the control of designated activities.
Concentration
- Strategic Control (SC): External environment.
- Operational Control (OC): Internal functions and organization.
Time Duration
- Strategic Control (SC): Long-term.
- Operational Control (OC): Short-term.
Control Tools
- Strategic Control (SC): Scanning of the environment, collection, collation, and review of information.
- Operational Control (OC): Application of the Balanced Scorecard.
Basic Components of the Balanced Scorecard
Perspectives
There are four standard perspectives as suggested by Kaplan and Norton: financial, customer, internal business process, and learning and growth.
Goals
These identify the critical factors for the success of an organization that must certainly be achieved.
Measures
These help an organization determine its success through strategy execution. The two fundamental purposes served by measures are organizational motivation and objective evaluation of the strategy, as well as strategic learning.
Targets
These define the level of performance or the rate of improvement that is needed.
Initiatives
These are key action programs that are required to achieve the objectives.
General Electric (GE) 9-Cell Matrix
The GE Nine-Cell Matrix, developed by General Electric and McKinsey, is a strategic tool used to evaluate business units or product lines based on two key dimensions:
- 1. Industry Attractiveness
- 2. Business Unit Strength
It helps managers prioritize investments and develop suitable strategies for different parts of the business.
1. Assess Industry Attractiveness
This involves evaluating external environmental factors, such as:
- Market growth rate
- Profitability
- Competitive intensity
- Technological advancements
- Entry barriers
Each industry is rated as High, Medium, or Low in attractiveness.
2. Evaluate Business Unit Strength
This measures how well the business performs within its industry, considering:
- Market share
- Brand equity
- Customer loyalty
- Product quality
- Distribution strength
- Innovation capability
Each unit is rated as Strong, Average, or Weak.
3. Plot on the 3×3 Matrix
The matrix has:
- Y-axis: Industry Attractiveness (High to Low)
- X-axis: Business Strength (Strong to Weak)
Each business unit is placed in one of the nine cells.
4. Strategic Implications
Based on the cell, strategic alternatives are:
- Grow/Invest: (High Attractiveness, Strong Unit)
- Focus on growth, R&D, and aggressive marketing.
- Selectivity/Earnings: (Medium combinations)
- Invest selectively; improve or maintain performance.
- Harvest/Divest: (Low Attractiveness, Weak Unit)
- Reduce investment or exit the market.
Value Chain Analysis
The term value chain describes the activities within and around an organization that together create a product or service. It is helpful in understanding how value is created or lost across the entire chain.
In other words, Value Chain Analysis (VCA) aims to identify where low-cost advantages or disadvantages exist anywhere along the value chain, from raw material to customer service activities. It comprises two major activities:
1. Primary Activities
Primary activities are subdivided into five categories:
- Inbound Logistics: Activities concerned with receiving, storing, and distributing materials, inventory control, warehousing, etc.
- Operations: Activities concerned with the transformation of inputs into the final product or service; for example, machining, packing, assembly, testing, etc.
- Outbound Logistics: Activities concerned with the collection, storage, and physical distribution of finished goods to consumers.
- Marketing and Sales: Activities concerned with advertising, selling, administration of sales personnel, etc.
- Service: Activities that enhance or maintain the value of a product or service, such as installation, repair, training, etc.
Some classify primary activities into two main functions:
- Manufacturing: Physical creation of the product.
- Marketing: Concerned with marketing, delivery, and after-sales service.
2. Support Activities
The support activities that provide inputs and infrastructure for primary activities of manufacturing and marketing are classified as follows:
- Material Management Activities
- Research and Development Activities
- Human Resources Activities
- Information Systems Activities
- Company Infrastructure Activities