Module 4 Business Strategies PDF

**MODULE 4** **BUSINESS STRATEGIES** LEARNING OBJECTIVES =================== After completing this module, you are expected to: i. discuss the components of supply chain management; ================================================== ii. define and explain the importance of inventory manage...

**MODULE 4** **BUSINESS STRATEGIES** LEARNING OBJECTIVES =================== After completing this module, you are expected to: i. discuss the components of supply chain management; ================================================== ii. define and explain the importance of inventory management; iii. contrast manufacturing from assembly; iv. examine the interrelationships of the sequential processes of the logistics circle; v. distinguish the role of innovation as a competitive strategy; and vi. explain why companies opt to implement stability or retrenchment strategies. [**Module 4 Business Strategies**](about:blank) LEARNING ACTIVITIES =================== **Individual Activity** ASSESSMENT/EVALUATION ===================== I. *Synchronous Test* with time limit. II. *Asynchronous Learning* 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 module, 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 reach 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. **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. a\. Use a Request for Quotation when the need is clear, the commodities are in constant use, and quotations are easily obtainable. 3\. Ask potential suppliers for their respective quotations, proposals, and bids. 7\. Lastly, invoice clearing and payment follows. In sourcing and ordering, value is generated when supplier relationships are created and managed in delivering quality products, delivering on time, delivering at competitive prices, providing good service back-up when needed, and keeping promises. **Inventory Management** Another facet of supply management is inventory management. The role of inventory is to buffer uncertainty. It includes all purchased materials and goods, partially completed materials and component parts, and finished goods. There are four broad categories of inventories. 2\. Work-in-process (WIP) 3\. Finished goods include all completed products for shipment. **Inventory Models** **Inventory management** is ordering the right quantity of SKUs (Stock Keeping Unit) at minimum inventory costs. **Inventory cost** is the sum total of ordering costs and carrying costs. **Ordering costs (**set-up costs) are variable costs associated with placing an order with the supplier like managerial and clerical costs in preparing the purchase, while **carrying costs** (holding costs) are incurred for holding inventory in storage like handling charges, warehousing expenses, insurance, pilferage, shrinkage, taxes, and costs of capital. The inventory model answers two questions: \"how much to order?\" and \"when to order?\" The question, how much to order, is answered by determining the economic order quantity (EOQ). EOQ seeks to determine an optimal order quantity where the sum of the annual order costs and annual carrying costs is minimized. On the other hand, the question, when to order, is answered by computing for the reorder point (RP). The application of the EOQ Model presupposes that the following are known and constant: demand, order lead time, price, carrying cost, and ordering cost. Likewise, this model assumes that replenishment is instantaneous and stockouts are not allowed. Lead time refers to the span of time (in days) it takes for a stock to be delivered from the time it was ordered, while instantaneous replenishment is delivery of stocks all at the same time. The value of inventory management is evidently reflected in the minimization of costs. This is achieved when organizations develop efficient ways of procuring their raw materials like accurately forecasting demand and ordering in bulk to avail of quantity discounts. Reduction in carrying costs lower handling costs, storage expenses, and costs of capital. Optimum ordering of stocks increases efficiency while scheduled purchases contribute to a decrease in inventory costs. Toyota, for example, espouses the concept of just-in-time. Just-in-time (JIT) is an operational strategy whereby the company estimates its demand for raw materials and makes sure that they are delivered on time. To effectively implement JIT, Toyota found it necessary to establish good supplier relationships. As a result, Toyota\'s operational costs largely decreased. It sold its cars in the United States at prices lower than Ford, General Motors, and Chrysler. Thus, it can be inferred that minimization in costs by an organization in its supply management activities like sourcing, ordering, and inventory management is a form of value creation where savings made by the organization can translate into lower prices for the consumers. **Production and Operations** **Production and operations** are processes that transform operational input into output to satisfy consumer needs and requirements. This transformational process consists of manufacturing and assembly. **Figure 4.2 Production and Operations Model** **Manufacturing** is the process of producing goods using people or machine resources. It commonly refers to industrial production where raw materials are converted into finished goods**. Assembly** is the process of putting together raw materials into a desired output. Quality raw materials and parts, efficient production layouts and processes, and employees with skills and motivation are essential to effective transformational processes. Once achieved, value can be generated through appealing product designs, quality and reliability, efficient service performance, accessible location site, attractive store displays, affordable prices, and good customer service.  **The Logistics Circle** Now a popular term in supply chain management, logistics management includes the supervision of certain sequential processes. These include warehousing, scheduling, dispatching, transportation, and delivery. **Figure 4.3 The Logistics Circle** 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 this 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 forms 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 contact sales, providing good working 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. **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 module 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** **Current Products** **"New" Products** --------------------- ---------------------- --------------------- **Current Markets** Market Penetration Product Development **New Markets** Market Development Diversification - **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, 24-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 the 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. - **Diversification** is a product/market mix growth strategy that involves creating differentiated products for new customers. In short, it is \"new\" products for new customers. Oftentimes, it is going to another product/ service area that is NOT related to one\'s current business or operations. For example, an aircraft manufacturer can diversify and go into the restaurant business or an accounting firm can manufacture a new robot pilot for airline companies. In summary, **growth strategies** are adopted by organizations to deal with the competitiveness in the industry milieu. There are different forms of growth strategies like market development, product development, and diversification. The interplay of these strategies may greatly help these organizations. **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 differentiation. **Table 4.2 Competitive Strategies (Porter 2008)** **Competitive Strategies** **Cost Leadership** **Differentiation** **Market Niche** ---------------------------- ----------------------------- -------------------------------- ----------------------------------------------- **Cost Leadership** Low-cost leadership Best-cost provider strategy Focused/market-niche lower cost strategy **Differentiation** Best-cost provider strategy Broad differentiation strategy Focused/market-niche differentiation strategy - **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. - **Broad Differentiation Strategy**. The objective of the broad differentiation competitive strategy is to provide a variety of products, services or product/service features that competitors do not offer or are not able to offer to consumers. This strategy is implemented when the organization offers a unique product/service with distinct traits and features that will appeal better to its customers/buyers. A mobile phone with a television feature is a broad differentiation strategy product. This is true of fast foods with playgrounds like slides and see-saws. - **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. - **Focused/market-niche Lower Cost Strategy**. This strategy is implemented when the organization concentrates on a limited market segment and creates a market niche based on lower costs. For example, there are low-cost condominium units that cater to middle class employees. An affordable and relaxed dwelling residence is an example of using a focused/market-niche lower cost strategy. Another example is a specialized audio and video equipment store that sells only these two types of products. Being dedicated, the store can purchase stocks in bulk, avail of price discounts, and therefore, sell at low prices. - **Focused/market-niche Differentiation Strategy**. This strategy is implemented when the organization concentrates on a limited market segment and creates a market niche based on differentiated features like design, utility, and practicality. An example of this focused/market-niche differentiation strategy is Rolex. Cost, design, quality, and branding are distinct features of Rolex watches. **Other Competitive Strategies** Other competitive strategies include innovation strategy, operational effectiveness strategy, economies of scale, and technology strategy.  - **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. - **Operational Effectiveness Strategy**. Some organizations operate with a high degree of inefficiencies in their internal business processes like wastes, downtime, longer cycle times, complaints, rejects, loses, absences, and others. These forms of incompetence, wastefulness, and inadequacies translate into financial leaks and reduction in potential profits. The objective of an operational effectiveness strategy is to make an organization perform better by making the structure lean, streamlining wasteful and inefficient processes, harnessing better facility and equipment maintenance, and increasing work force productivity. - **Economies of Scale**. When applied as a competitive strategy, economies of scale lowers costs because of volume. In other words, the more a product/service is produced, the lower the costs are for producing the product and rendering the service. - **Technology Strategy**. The advantage of gearing toward technology cannot be overemphasized. Technology can be applied system-wise through digital integration. As organizations realize the benefits of going digital, they aggressively pursue this thrust. Functional activities like accounting, marketing, purchasing, human resource management, production, and operations are interconnected using enterprise resource planning. Enterprise resource planning facilitates processes to radical speed by shortening completion time. Technology applications allow organizations to perfect their products and services to a high degree of accuracy and quality, thus, adding to marketability. A technological organization naturally creates a monopolistic paradigm and as a result, allows the organization to dictate prices in the business world. These are generally true for technology start-up organizations to bring about significant improvements by redesigning through research and development and re-engineering their products and services. **Life Cycle Strategies** In the context of the horizontal boundaries of the firm, it is worth reviewing the product lifecycle. The **lifecycle** of any product/service refers to the lifespan that a commodity/service undergoes from its introduction stage to its growth, maturity, and decline stages. 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 of competitors increases. Although sales and profits generally reach their peak, it is in this phase where 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 sales, consolidate with other organizations, or simply exit the market. Implementing strategies 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 decline 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. **Divestment** is 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, products and services, production and operations, infrastructure, and finances.** **Figure 4.5 Turnaround Strategy Model** a. **Climate and Culture**. The toughest and most challenging area for any organization undergoing a turnaround strategy is the climate and culture. Generally, a new chief executive officer comes in and takes over the critical organization. With a generally demoralized and uncertain workforce, employees feel a certain ambiguity and hesitancy. Aside from job security, they are unsure how the new CEO will manage the organization. Essentially, the strategy is to first study the organization and audit the job descriptions of each of the employee vis-a-vis their functionality in their departments or business units. After in-depth study is done, certain people strategies can be adopted. 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. c. **Production and Operations**. In the implementation of turnaround strategies, this is the easiest phase to sort out and manage. The CEO can look into the processes of the organization, determine which processes are redundant and defective, and undertake piecemeal improvements. Questions asked will include finding out whether the processes are lean and efficient, whether there is a need to conduct facility, equipment, production, and operation review, whether the percentage of wastes, rejects, and downtime is high, and whether cycle time is high or very high. Once the organization competently reviews and addresses these areas, financial savings can easily be generated. d. **Infrastructure.** Turnaround strategies can easily achieve significant improvements when the infrastructure is correctly assessed and appropriate interventions are introduced or reinforced. Technology is the best infrastructure strategy that can bring about radical improvements. An organization seeking to turn itself around can look at its structure and system and implement needed step-ups and enhancements. e. **Finances**. When an organization needs a turnaround strategy, it is because its finances are waving a \"red flag.\" This may mean that the organization is losing money or is marginally profitable, causing concerns to investors. Once the aspects of climate and culture, products and services, production and operations, and infrastructure have been adequately confronted and substantial interventions have been successfully implemented, the financial aspect will take care of itself. Products generally follow a life cycle-introduction, growth, maturity, and decline. In every stage, certain unique strategies can be adopted to bring about greater sales. Some companies are able to prevent atrophy (death of a business/organization) if more creative strategies are implemented. In addition, there are organizations that opt for maintaining the status by applying stability strategies. For organizations that seem to be on the verge of closing because of certain reasons, retrenchment strategies can be employed. **END OF MODULE 4 Business Strategies**