Chapter 4 Strama
Chapter 4 Strama
Chapter 4 Strama
Because of the volatility of the environment, business survival has become more
challenging than ever. There is a greater demand for an honest review of functional activities and
development of a proactive mindset through various strategic modes of growth and
competitiveness. Realignment, enhancement, reinventing, strategizing, and refocusing have
become more imperative to any organization. In this chapter, we will discuss value chain analysis
and the different types of business strategies. These include growth strategies, competitive
strategies, life cycle strategies, stability strategies, and turnaround strategies.
Value Chain Analysis
As global markets widen, businesses have to pay closer attention to where their raw
materials come from, how they are produced, how finished products are stored and transported,
and what their end products users are really asking for. The main business definition of any
organization is to produce goods or render services, and to achieve these set goals and objectives,
it engages in a series of activities. If an organization wants to be profitable, it has to sell value to
its buyers value that is worth paying for. Thus, the whole concept of value chain analysis comes
to the picture. Value chain is a general term that refers to a sequence of interlinked undertakings
that an organization operating in a specific Industry engages in. It looks at every phase of the
business from the time of procurement of raw materials to the time its products reaches its
eventual end users or consumers. The value chain concept is concretized in supply chain
management. Here, value creation is greatly emphasized.
Supply Chain Management
Supply chain management is a broad continuum of specific activities employed by a
company, it consists of the following:
purchasing or supply management which includes the sourcing, ordering, and inventory
storing of raw materials, parts, and services;
production and operations, also known as manufacturing and assembly;
logistics which is the efficient warehousing, inventory tracking, order entry, management,
distribution and delivery to customers; and
marketing and sales which includes promoting and selling to customers.
Logistics
- Warehousing
- Scheduling
- Transportation
- Delivery
Supply Management
- Sourcing and Marketing & Sales
Ordering Organization - Promotion
- Inventory - Selling
Management
Production/ Operations
- Manufacturing
- Assembly
Figure 4.1 Supply Chain Management
Supply Management
Supply management is now a popular term used for purchasing which was formerly
termed as procurement. It is a key business function that is responsible for: (1) identifying
material and service needs; (2) locating and selecting suppliers; negotiating and closing contracts;
(3) acquiring the needed materials, services, and equipment; (4) monitoring inventory stock
keeping units; and (5) tracking supplier performance.
In this stage, it is important to create “value” by establishing and managing supplier
relationships, identifying strategic sources, accurately forecasting demand requirements, and
understanding inventory management. Thus, the goal of supply management is to obtain the
right materials by meeting quality requirements in the right quantity, for delivery at the right
time and the right place, from the right source, with the right service, and at the right price. In
addition, supply management objectives include improving the organization’s competitive
position, providing uninterrupted flow of materials, supplies, and services, keeping inventory and
loss at a minimum, maintaining and improving quality, finding best-in-class suppliers, purchasing
at lowest total costs, and achieving harmonious relations with suppliers.
Sourcing and Ordering
Following are the steps to take when an organization needs to source out raw materials
or parts.
1. Specify the need clearly by writing down the details. Normally, the stock keeping unit
(SKU) is coded with brief but complete details like date, identification number, the
originating department, the account to be charged, complete description of the raw
material/services, date needed, any special instruction, and signature of authorized
person making the request.
2. Identity and analyse sources of supply. Generally, more than one supplier should be
considered. The criteria for choosing suppliers are sound business sense and attitude,
good record of accomplishment, sound financial base, suitable technical capability,
quality orientation, customer service mentality, and effective logistical arrangements.
a. Use a Request for Quotation when the need is clear, the commodities are in
constant use, and quotations are easily obtainable.
b. Use a Request for Proposal when the buyer has complex requirements and plans
to use negotiation to determine price and terms.
c. Lastly, use a Request for Bid When the desire is a competitive bid process
3. Ask potential suppliers for their respective quotations, proposals, and bids.
4. Compare and evaluate submitted documents, then select the suppliers. Both buyers and
suppliers agree and determine the terms of the contract. Correspondingly, the negotiated
order placements follow.
5. Prepare, place, follow up, and expedite the purchase order (PO). The purchase order is a
written requisition placement to purchase supplies.
6. Confirm that the order placed has actually arrived in good condition and at the quantity.
Forward the shipment to its destination, properly document and register the receipt, and
forward it to the accepting party/parties.
Transformational
Input Output
Process
(5) (2)
Delivery Scheduling
Logistics
Circle
(4) (3)
Transportation Dispatching
2. Scheduling is the act of organizing these inventory units and booking them for delivery.
3. Dispatching products are for transfer, this may include posting, mailing, shipping out,
transmitting, forwarding, or releasing commodities.
4. Transportation scheduling and other logistics are necessary to make dispatching cost
efficient. The goal is to minimize transportation costs. Therefore, considerations have to
be prioritized in terms of location site, ease, or gravity of traffic, safety, and labour
requirements.
5. Delivery to the specified site is undertaken. It closes the entire logistics circle.
Marketing and Sales
Products are produced and services are rendered for ultimate release to customers.
Therefore, there is a need to market these merchandise to interested buyers. Companies can
adopt different modes of marketing to attract and sell to customers. They can study the unique
purchasing patterns of buyers and determine what will translate their desire for the products
into actual purchase. Aside from coming up with good and distinct products, businesses can offer
competitive pricing like special offers, quantity discounts, and volume sales, among others. They
can aggressively promote the products through advertisements in newspapers, magazines, radio,
television, and other form of promotional mediums. In all instances, while marketing their
products and services, companies will need to complement their efforts with developing
salespeople through result-oriented sales trainings, giving competitive salaries that will motivate
them to contract sales, providing good waking conditions for better productivity coupled with
inspirational leadership.
In summary, supply chain management is a complete sequence of processes that includes
purchasing, production and operations, delivery, and marketing and sales. It is actually a
complete management cycle where efficiency between and among the procedures essentially
brings about optimum output.
Questions 4.1
1. What is the concept of value chain analysis?
2. What are the four components of supply chain management?
3. In what ways are sourcing and ordering related to inventory management? Give at least
two examples.
4. Describe the production and operations model. What is the relationship between
manufacturing and assembly?
5. What are the components of the logistics circle? What possible problems can companies
encounter in managing their logistics?
6. How should companies conduct the marketing and sales of their products and services?
Growth Strategies
The adoption and implementation of a growth strategy is one of the most important
considerations for every organization. Particularly, growth strategies are carefully studied and
deliberately carried out by organizations for the following reasons: they want to survive the
hypercompetitive environment and not perish; they want to increase their earnings or income;
they want to create their advantage among competitors; or they may want to increase their
market leadership in a given industry. Growth strategy is a mode adopted by an organization to
achieve its main objectives of increasing in volume and turnover. Growth strategies can be
internal or integrative. This chapter will discuss internal growth strategies.
Internal Growth Strategies
Internal growth strategies are approaches adopted within the company. These broad
growth strategies can be any of the following: market penetration, market development, product
development, and diversification. The interrelationships of these four constructs are shown in
Table 4.1. In this table, the two main variables considered are products and markets, possessing
two properties: current and new.
Table 4.1 Product/Market Mix Internal Growth Strategy
Market penetration suggests that for an organization to increase its growth, market
penetration can be actualized by selling more of its current products/services to its
current customers or buyers. It is the least risky for any company to pursue. For example,
if we are selling a six pack of Coca Cola, then we can push for a 12-pack, and so on.
Market development is the process where a company can sell more of its current products
by seeking and tapping new markets. It is a little more challenging. For example, if a
company has a chicken fast food chain in Luzon, then it can open new outlets in Visayas
and eventually, in Mindanao.
Product development is an internal growth strategy where the company sells “new”
products to an existing market. In this strategy, there is a need for the organization to be
more creative in coming up with differentiated products and services. The products or
services need not be new in its truest essence but instead, may be results of
product/service enhancement, redesign, or reinvention. For example, a company
develops a versatile shampoo product that can be used without wetting the hair.
Questions 4.2
1. What are growth strategies? What are internal growth strategies?
2. When is market penetration a good growth strategy? Give at least two examples.
3. What specific strategies (at least two) will you propose to a company of your choice to
implement market development?
4. What does it entail to pursue product development? Come up with a new or
differentiated product for an existing company.
5. Is it easy to adopt diversification internal growth strategy? Give the challenges allied to
pursuing this strategy. Use an existing company.
Competitive Strategies
Organizations cannot avoid the permeating competition existing in the business
environment. Thus, competitive strategies are designed to deal with this so-called reality of
hypercompetition. Competitive strategies are essentially long-term action plans prepared with
the end goal of directing how an organization will survive and compete. These strategies are
formulated to help organizations gain competitive advantage after evaluating and comparing
their strengths and weaknesses against their competitors.
Competition comes in distinctive forms, it may be in the product/service of the company like
design, functionality, and versatility, pricing of products/services offered, and the benefits
accompanying the product/service offerings like warranties and after-sales services. Types of
competitive strategies consist of low-cost leadership strategy, broad differentiation strategy,
best-cost provider strategy, focused/market-niche strategy based on lower cost, and
focused/market-niche strategy based on differentiations.
Table 4.2 Competitive Strategies (Porter 2008)
Low-cost Leadership Strategy. The objective of the low cost leadership competitive
strategy is to offer products and services at the lowest cost possible in the industry. This
strategy is implemented when the organization makes every effort to be the most
effective, if not the overall, low-cost provider of a service or product. For example, Cebu
Pacific Airlines uses the low-cost leadership strategy to capture the broadest reach of air
traveling customers by offering airfares at low prices.
Best-cost Provider Strategy. This strategy is a combination of the low-cost leadership and
broad differentiation strategies. It is implemented when the organization gives its
customers more value for money by emphasizing both low-cost products and services
with unique features. The end goal is keeping its customers. For example, Baclaran
increases its customer base by selling varied, wide-ranged numbers, and low-cost
products in large quantities.
Innovation Strategy. Although innovation, in the strictest sense of the word, is anything
that is new and original, this strategy is difficult to implement. The goal of a competitive
innovation strategy is to radically catapult or leapfrog the organization by introducing
completely new and highly differentiated products and services that give an organization
a competitive posturing. Robotics is a concrete example where automation, engineering,
science, computing, and manufacturing are collaboratively used to create a cybernetics
product.
Questions 4.3
1. How do you define competitive strategies?
2. When is adopting cost leadership strategy advantageous to the company? Explain your
answer.
3. What does a company get when it pursues a competitive differentiation strategy? Give
an example to support your answer.
4. Is the market-niche strategy better than the cost leadership and differentiation
strategies? Why?
5. Is innovation strategy a practical strategy to pursue? Explain your answer.
6. What do economies of scale do to a company? Give at least two examples.
7. In what ways do implementing technology strategies help companies?
8. Is operational effectiveness always a practical competitive strategy? Explain your answer.
9. Can you think of any company that used innovation as a competitive strategy?
The phases in the life cycle of a product/service are sequential in development. While a
product undergoes its life cycle, external and internal forces in the environment affect the
product/service ranging from consumer expectations, technological development, and
competition to other wide-ranging issues and challenges. In many instances, organizations have
little control over forces. Take note too, that products and services have different life cycle
patterns.
The introduction stage is the period of launching the product/service for acceptance. In
this phase, the product/service is new; hence, there is a need to create awareness.
Strategies include promotions, giving discounts, and market development, among others.
Depending on the type of product/service, the acceptance phase may either be short or
long.
The growth stage is the phase where the product/service gains acceptance by the
consumers. In this phase, sales and profit slowly increase and emphasis is now on
continuous market development and improvement. Competition becomes more
challenging. Here, the organization can focus on branding, building customer loyalty, and
promoting repeat business through customer patronage.
The maturity stage is the period where the product has reached its penultimate level.
Here, the established product tends to remain steady and the number competitors
increases. Although sales and profits generally reach their peak, it is in this phase the
organization should start reinventing its products/services to maintain their current
levels. Product differentiation is recommended in this stage, as well as efficient
operations and formulation of creative marketing strategies.
The decline stage is the period where the product/service begins to reach or is reaching
its lowest point. Here, sales and profits decline and price competition is intense. An
organization can choose to keep the status quo, reduce prices to generate more
consolidate with other organizations, or simply exit the market. Implementing sum like
product/service reinvention and aggressive marketing can be helpful.
Not all products follow the S-shaped product life cycle curve. Some products are briefly
introduced but die quickly. Others stay in the maturity stage for a long time. Some enter the stage
and then are recycled back into the growth stage through strong promotion and repositioning.
Stability Strategies
For organizations that are doing fine or are doing better in their existing businesses, they
may choose not to implement any growth strategy. They may not want to apply any competitive
strategy and hence, decide to keep the status quo. Not adopting any growth or competitive
strategy is a choice that organizations make. Stable with their current businesses, some
organizations are comfortable with their current market niche and any loud strategy may attract
the attention of competitors.
For example, there are businesses that are successful monopolies in their own right with
no new entrants. They continue to enjoy their profits. On the other hand, there are organizations
that have not decided to expand and become big. They are just content with what they have.
Retrenchment Strategies
Sometimes, companies encounter serious difficulties. When a company’s survival is
threatened or when it is not competing effectively, it usually takes time to sit down and review
its current situation. There are different modes of dealing with this situation. They are the
following:
1. Liquidation is the most radical action a company takes when the company is losing money
and thus, is further compounded by a disinterest on the part of the stockholders to do
anything more to save it. In such cases, the business may be terminated and its assets
sold.
2. Divestments implemented when a company consistently fails to reach the set objectives
or when the company does not fit well in the organization. Thus, the stockholders would
preferably sell it or set is as a separate corporation.
3. A turnaround strategy is adopted when the organization has reached a significant level of
non-performance, non-productivity, demoralization, and unprofitability, and therefore,
has to implement restorative strategies. Organizations in this level have serious problems
that may lead to possible closure. Once an organization decides to continue, turnaround
strategies are implemented. In a turnaround strategy, the organization should focus on
the following areas: climate and culture, products and services, production and
operations, infrastructure, and finances.
Finances
Productions &
Infrastucture
Operations
Turnaround
Strategy
b. Products and Services. A review of the products offered and services rendered is needed;
ask questions like what products/services are marketable in the industry, which of these
products and services need some improvements or major redesign, and what distinct
features can be introduced to attract buyers. Note that some products and services that
were once saleable and attractive may eventually lose their customer appeal. Because of
rivalries among competitors, these goods may have become obsolete, dysfunctional, too
expensive, of low quality and therefore, not competitive. When the organization gives
due and serious attention to these concerns, the product/service competitiveness aspect
would have been half addressed.
Questions 4.4
1. What are the different phases of the life cycle of a product or a service? Suggest additional
strategies for each phase of the life cycle. Give examples.
2. Why do some organizations decide to adopt stability strategies? Explain your answer.
3. Given the three types of retrenchment strategies, what are the advantages and
disadvantages of implementing liquidation or divestment?
4. When is an organization in need of a turnabout? Cite examples of turnaround strategies.
Which is the easiest to implement and the hardest to actualize?