Strategic Management - Understanding a model Essay

Strategic Management - Understanding a model - Essay Example Strategy has, therefore, been defined as a unifying theme bringing coherence and direction to the organization towards its goals (Grant, 2010). These goals have expanded beyond the traditional realm of profit maximization towards economic value creation, disruptive innovation or techniques as well as considering the social and environmental impact of firms’ activities. Strategy, therefore, aligns stakeholders (shareholders, investors, personnel, suppliers, etc) with respect to organizational goals and facilitates their attainment. 1.2 Porter’s five forces model- History The figure (see Appendix 1) shows that, in the 1950’s and 1960’s, strategic management was focused on corporate planning and growth along with tighter financial controls and budgeting (Grant, 2010). Medium-term horizons, including 5-year plans, were set and used to develop macro-economic forecasts (Grant, 2010). The market players were relatively independent and were governed primarily by t he macro-economic forces, with little regard to the strategy of other players. The 70’s, with the internationalization of economy and events such as surge in oil prices further emphasized macro-economic volatility (Grant, 2010). Strategists approached a more granular level of analysis to find the best direction for the firm. Porter’s model of the Five Forces highlighted the economic implications on industry structure which put knowledge-based innovation and strategy at the forefront (Ryall, 2013). The model goes beyond the traditional â€Å"narrowly† defined view of competition as competing merely for profits to encompass other competitive forces such as suppliers, buyers, substitutes and threat of new entrants in the market (Porter, 2008). The model provides insight into the competitiveness of an industry, demonstrating that not all industries are equally profitable (see Appendix 2). It is rooted in the notion of creating and maintaining a competitive advantage (Nilsson & Rapp, 2005). Though (corporate) planning remains part of strategic design, the Five Forces model places this exercise in a more realistic industry-specific context. 1.2.2 Porter’s Five Forces Model - Definition 1.2.2.1 New Entrants It is important to consider that the threat of new entrants will depend on barriers to entry, and even barriers to exit as well as the reaction from incumbents. The theory identifies typical barriers to entry as: i. Economies of scale which result in lower production costs for already established players owing to their large volumes. ii. Significant investment is required for differentiation to override customer loyalty towards already established brands. iii. Capital requirement to build the business (plants, facilities, R&D efforts etc.) or equivalent acquisition of an existing business. iv. Experience in the business as well as patent protection provides a cost advantage to incumbents v. Regulations and laws prescribing business poli cies that impact costs or result in delay to enter the market (Henry, 2008). Furthermore, the reaction of incumbents creates additional threat to the shares of newcomers. i. Retaliation ii. Slow growth of industry or over-capacity: The lack of capacity may make it difficult to absorb new entrants. This can occur in several phases of an industry’s cycle. iii. The price conditions must enable the newcomer to be profitable. In this case, the total costs of entry should be lower than the market price