Strategic Business Frameworks and Concepts
Blue Ocean vs. Red Ocean Strategy
- Blue Ocean Strategy focuses on creating uncontested market space.
- Red Ocean Strategy competes in existing market space.
- Blue Ocean Strategy makes the competition irrelevant.
- Red Ocean Strategy aims to beat the competition.
- Blue Ocean Strategy creates and captures new demand.
- Red Ocean Strategy exploits existing demand.
- Blue Ocean Strategy breaks the value/cost trade-off.
- Red Ocean Strategy makes the value/cost trade-off.
- Blue Ocean Strategy aligns the whole system of a company’s activities in pursuit of both differentiation and low cost.
- Red Ocean Strategy aligns the whole system of a company’s activities with its strategic choice of either differentiation or low cost.
Gap Analysis
It is a useful tool in assessing strategic capabilities. It describes the process involved in deciding what course of action should be taken to remove any potential profit, sales, or risk gap. It is used to identify the extent to which existing strategies will fail to meet performance objectives in the future (Kachru, 2006).
There are four possible gaps that can be identified through Gap Analysis:
- Profit Gap: Gap between profit for the past few years and profit projection based on freehand projection, linear regression coefficient, or exponential smoothing.
- Sales Gap: Gap between planned and actual sales.
- Product Gap: Difference between what a firm offers in terms of product items and what the industry provides in terms of product line.
- Risk Gap: Gap between anticipated risk with a strategic decision and the actual happening.
Vertical Integration
Vertical integration is a business strategy used to expand a firm by gaining ownership of a company that operates in the production process of the same industry. It can be a supplier, a distributor, or a packaging firm, among others. Through vertical integration, a company tries to strengthen its supply chain, reduce production costs, and also access new distribution channels.
Apple Inc.
Apple is a notable example of a company that practices vertical integration. The company designs its own hardware and software, produces its own devices, operates its own logistics network, and sells these products through its retail stores and online platform.
Starbucks
Starbucks is another company that practices vertical integration. It owns the entire supply chain, from owning the coffee farms, handling distribution, and finally, to the point of sale in the coffee shops.
Horizontal Integration
When a company wishes to grow through horizontal integration, it looks to acquire similar companies in the same industry in which it operates. The acquisition or merger helps the main acquiring company to increase its size, diversify its product offerings or services, achieve economies of scale, gain access to new markets, and, of course, reduce competition.
Advantages of Horizontal Integration
- Achieve economies of scale
- Block competition
- Product differentiation
- Increased bargaining power over suppliers and buyers
Disadvantages of Horizontal Integration
- Creation of monopoly
- Increased workload
Licensing vs. Franchising: Key Differences
Control
- In licensing, the licensor has minimal control.
- In franchising, the franchisor has significant control over operations.
Registration
- Licensing does not require registration.
- Franchising registration is mandatory under legal regulations.
Training & Support
- Licensing usually does not include training or support.
- Franchising provides training and support to maintain brand standards.
Fee Structure
- Licensing involves a negotiable fee structure.
- Franchising uses a standardized fee system.
Business Model
- Licensing is based on intellectual property and products.
- Franchising involves replicating an established business model.
Offensive Strategies Defined
An offensive strategy involves a company’s actions directed against market leaders to secure competitive advantage. Offensive business strategies involve taking proactive, often aggressive action in the market. This action can be focused directly at competitors or aimed at securing market share regardless of the existing competition. Offensive strategies include a dramatic reduction of price, a highly creative and imaginative advertising campaign, or a uniquely designed new product that significantly attracts customers. An offensive competitive strategy is a type of corporate strategy that consists of actively pursuing changes within the industry. Companies that go on the offensive generally invest heavily in research and development (R&D) and technology in an effort to stay ahead of the competition. They will also challenge competitors by targeting new or underserved markets, or by going head-to-head with them.
Types of Offensive Strategies
- Frontal Attack (to match competitor’s strength)
- Flank Attack (to capitalize on competitor weakness)
- Encirclement Attack (immediate initiatives on many fronts)
- Bypass Attack or Leapfrog Strategy or End-Run Offensive
- Guerrilla Strategy
- Preemptive Strikes
Defensive Strategies Explained
Defensive strategy is defined as a marketing tool that helps companies to retain valuable customers that can be taken away by competitors. Competitors can be defined as other firms that are located in the same market category or sell similar products to the same segment of people. Defensive strategies are primarily employed by market leaders in strategic management.
Types of Defensive Strategies
- Position Defense
- Mobile Defense
- Flanking Defense
- Counter-Offensive Defense
- Contraction Defense
Understanding Retrenchment Strategy
Retrenchment strategy is a corporate-level strategy adopted by companies to cut down or reduce the scale of operations in order to control losses, improve efficiency, and restore financial stability. It is usually implemented when a business is facing a decline in performance, continuous losses, or intense market competition. Retrenchment strategy is not a sign of failure but a corrective measure to bring the business back on track.
Methods of Retrenchment Strategy
- Turnaround Strategy: This involves identifying the causes of poor performance and taking corrective actions such as cost-cutting, restructuring, and improving operational efficiency. It is used when the business has potential to recover.
- Divestment Strategy: Under this, a firm sells parts of its business, such as a product line, division, or subsidiary that is unprofitable or does not fit into its core objectives. This helps in raising funds and focusing on more profitable areas.
- Liquidation Strategy: This is the most extreme form of retrenchment. The company closes down operations and sells off its assets either partly or entirely. It is adopted when revival is not possible, and continuing operation would lead to further losses.
Essentials of a Successful Turnaround Strategy
The essentials of a successful turnaround strategy are:
- Problem Identification: Clearly understanding the root cause of failure or decline.
- Strong Leadership: Appointing capable leaders who can drive change and take quick decisions.
- Cost Control: Reducing unnecessary expenses and improving operational efficiency.
- Strategic Focus: Concentrating on core strengths and profitable areas of the business.