Planning is a formal process of choosing the company’s vision and mission. As discussed in the previous article, strategic planning is subdivided into 10 steps. The first five steps were discussed in the previous article. Next comes developing strategies to fill the gap. And since there are many ways to fill the gap, this article will be covering the majority of them.
Strategies to fill the profit gap
In all companies, different methods are used. This is due to their systems and the way they operate.
Corporate-level strategies include internal growth strategies and external growth strategies. As well as turnaround strategies and co-operative strategies.
Internal growth strategies include more product design and development. For example, market penetration. This means you would sell more existing products into an existing market. Another internal strategy is market development. That is to say that you sell existing products in a new market. Furthermore, product development is also an internal strategy. In other words, developing new products for an existing market. Lastly, innovation. Which is creating new products for a new market.
External growth strategies include getting involved in other stages of the value chain. Or even diversifying. External strategies are of 4 types. Namely, Vertical forward integration, vertical backward integration, horizontal integration, and diversification. Vertical forward means that a company moves closer to the consumer. For instance, Tiger brands owned Spar Groups. Vertical backward happens when a company goes into businesses of its suppliers. For example, SA Breweries owns hops farms. This is to ensure on-time delivery. Or even stabilize prices. Second-to-last, is horizontal integration. This means to merge with business in a similar line. For example, if Adidas and Nike had to merge.
This is also an external growth strategy. It refers to the goods provided by a company and the number of different markets it serves. There are a few to identify risks and opportunities in diversification. For example, what can we do better than our competitors if we enter a new market? What assets are needed to succeed in the new market? Furthermore, there are 2 types of diversification. Related diversification is a company that provides a variety of similar products. City Lodge Hotels have Town Lodges and Road Lodges. The second is unrelated business diversification. This is a company that provides many different products to different markets. For instance, Tiger Brands offers domestic food, consumer healthcare, pharmaceuticals, and fishing products.
Turnaround strategies go back to the corporate level. That is to say, this focuses on change and cost reduction. Namely, the speed of the change. Some examples of this include retrenchment. Which involves cost-cutting. Another is revenue growth. To achieve this you can reduce prices and have promotions. Another example of a turnaround strategy is divestiture. This means you sell part of the business.
Business-level strategies are one level ‘below’ corporate level. This means it focuses more on the business. It also takes action to achieve specific goals in a specific market. A strategic business unit (SBU) has a unique business mission, product line, and competitors, parallel to other SBUs in the company. For example, Walt Disney. They have theme parks, movies, and retail shops.
Some things to think about are who are you serving? And what needs will be satisfied? How will it be satisfied? According to Louw & Venter, there are 5 generic competitive strategies. The first is differentiation. This involves offering products that a customer sees as unique. Furthermore, there are a few ways to achieve differentiation. For example, innovative product design, high quality, brand image, or customer service leadership. The second way to achieve differentiation is by cost leadership. This means that you provide goods that are low or lower than your competitors. For example, Pep stores! To achieve cost leadership, you should ensure tight cost control. This means to reduce overheads. Another aspect to ensure is that you focus on high volumes.
The third competitive strategy is the best cost strategy. That is to say you provide highly differentiated products at a low cost. For example, the toyoate lexus monel or Singapore Airlines. They make sure to produce good quality at lower prices. The fourth strategy is focus differentiation. This means you focus in a niche (a small market). That is to say, yous focus of unique needs of certain customers. For example, Porsche owners. And the last competitive strategy is focus cost leadership. Which talks about a providing services to a niche at a low cost. For instance, City Lodge Hotels.
These are at functional level. They are designs to equip business-level strategies.
- Human resources: reward system, performance appraisal system, recruitment, fair treatment of minorities
- Finance: a mixture of borrowed funds and equity funds. % of profit for reinvestment; funding allocation criteria; credit granting criteria
- Marketing: goods/services to be emphasised; distribution medium, competition based on price or other factors, corporate image and product features to emphasise
- Operations (manufacturing): level of commitment to total quality, supplier selection, focus on production runs of according to customer orders, automation or not to improve productivity.
Louw, L. & Venter, P. 2013. Strategic Management: Developing Sustainability in Southern Africa. 3rd Edition. Cape Town: Oxford Press