Posted in Marketing & Strategy Articles, Total Reads: 781
, Published on 29 March 2015
Strategy is the ability of an organization to redefine competition, allocate resources to create relevant capabilities and create superior value proposition to cost better than others. However strategy of an organization is also influenced by the firm’s industry position/status.
There exists significant difference in the profitability of firms across different industry which is mainly dependent on its position in industry life cycle. For instance airlines industry has reached maturity state and since many players have entered in this industry, because of high competition, it is becoming more prise sensitive and hence the profitability in this industry is less in comparison to other industry.
Also the industry’s overall picture does not clearly indicate the individual firm’s potential because a few of them would follow a differentiating strategy which tends to make them more profitable than its competitors (Eg: Software Industry has high profitability of around 30% and airlines around 5%. However South-west airlines makes a profit of around 30%). So firm level capability/competitive advantage are the key entities its profitability.
South-west airlines focuses on core activity and optimise the cost structure and has positioned itself as Focused cost leader
British airlines provide other services and create an experience while travel for its passengers and has positioned itself as overall differentiator.
It is observed that as the industry matures the profitability of the industry as a whole decreases because many players steps in and profitability of the firm in the industry depends on Process optimization. However success of a firm in emerging industry is driven by product differentiation.
It is also wise to diversify to other related business where the firm can capitalise its existing core competency when the industry is approaching the end of growth phase because the profitability of the firm tend to decrease once the industry hits maturity. Doing this also enables optimal utilization of existing resources and can achieve economy of scale and scope.
However many company fails diversifying at the right time because
• They would like to enjoy the profits on the investments made for a longer period
• Firms would not know the right time for diversification because the whole business is very dynamic and is unpredictable (Companies like Apple were never into mobile business. However it did offensively diversified into mobile business and became a prominent player within 2 years of inception.).
• As the firm starts making profit, they become complacent and forget to diversify or focusing on product differentiation for sustainability (Nokia was highly profitable during the period 2007-09. During this period, it didn’t focus on differentiating its products. Samsung capitalised this and introduced many smart phones at different price range catering to different customer segments.).
It is also very essential to consider not only economy of scale and scope at the time of diversification bust should also give importance to assess if the new business can gel with the existing business.
• Cavinkare, for instance had a strong presence in cosmetics segment in the market. Once the giant players like HUL, P&G and other players stepped in, it started diversifying into restaurant business and was not well accepted by the customers since the brand cavinkare was more related to cosmetic products.
• Vicco, diversified into tooth paste business when it was renowned for its ayurvedic beauty cream since and failed since beauty product and tooth paste didn’t go hand in hand.
Once the business strategy is designed, it is very essential to communicate the same at each level of employees in the organization to be successful.
However implementation is challenging because of
• Power structure hindrance - There would be a set of employees at the mid level in the organization who would resist to the changes and is hard to bypass them.
• Information sharing – Generally strategic execution is not properly documented at each levels in the organization. Also understanding of the corporate strategy by line managers may not be clear. In such scenario, we cannot expect the employees in the organization to understand the strategy of the firm
• Lack of resources – It is not only lack of monetary resource but also lack of skilled labour force to adapt the strategy.
• Lack of incentives – Execution of the strategy is not incentivised properly and there is not much metrics to measure the execution status.
• It is harder to bring structural changes in the organization catering the strategic plans as the size of the organization increases.
• Top management interest fades as time passes by.
• Lack of clarity on roles/responsibility (accountability)
The classic example of the issues mentioned above is Sigareni collieries. Once the transparency in the organization was established and the strategy was communicated at all levels in the organization, the company started making profits.
So it is very essential to document the strategy for an organization also due importance has to be given on its execution. It is also wise to include a few line managers in the strategy formulation so that the execution of the same will be much easier since they would get a clear understanding of what their firm is heading towards and also the management can handle the potential obstacles which may happen during execution phase.
Also the organization can consider keeping the targets which can be measured so that whole organization can fall in line with the formulated strategy.
This article has been authored by Venkatesh KG from Great Lakes Institute Of Management,Chennai
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