Step 1: Choose an Organization
The first step is to choose an organization:
International Flavors & Fragrances (IFF) (Company selected)
Step 2: Examine Your Client Organization’s Background
Now that you have chosen a client organization, you need to create an organization profile. As you begin to develop your organization profile, the first step is to gather information about your organization’s background. Do some research on your organization’s website. Write up the background information using the following guidelines:
- Introduce the organization. What business is it in?
- Describe the organization’s recent financial performance.
- State where the organization is located and identify its major customers.
- Provide a brief history of the organization.
- State the size of the organization in terms of employees and revenues.
- Describe the organizational structure and identify major roles or functions of key individuals in the organization.
Step 3: Analyze the Strategy and Competitive Position of the Organization
The next step in developing your organization profile is to determine the strategy and competitive position for your organization. Include your findings from the following actions in your profile:
- Perform a detailed assessment of your organization’s current business strategy and recommend specific actions for gaining and sustaining superior performance in relation to your organization’s competitors.
Business Strategy
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where,” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
Lewis Carroll, Alice in Wonderland
Strategy is essentially a comprehensive plan to help an organization achieve its specific business objectives, such as growth, a stronger competitive position, or stronger financial performance. The choice of objective lies at the heart of the strategy. As a result, strategies reflect the company’s strengths, vulnerabilities, resources, and opportunities. They also reflect the firm’s competitors and its market.
The strategy matches internal resources to changing external demand. It determines how the firm differentiates itself from competitors and how it earns revenues and profits. Strategy formation is a dynamic process because the external environment is constantly changing.
Strategies focus on meeting objectives. We often hear of marketing strategies, when what is actually being described is the firm’s competitive strategy. Furthermore, a firm’s financial strategy is different from its pricing strategy or operational strategy. Most firms in fact have many strategies, which are likely to interact, but each has a different objective and different action plan.
A company may have different product lines and different businesses. To manage all facets and divisions of the company, the strategic framework is organized into a hierarchy. At the top sits the corporate strategy. The corporate strategy is concerned with top-level business objectives: earn, sustain, and grow profits. It answers the question, exactly how does the company achieve its profit objectives?
Typically we consider strategy at three levels, as shown in the list below.
Hierarchical Framework of Strategy
Hierarchical Framework of Strategy
- Corporate strategy Overall direction
Focuses on functional areas, such as marketing and R&D to achieve business objectives
- Business strategy Competitive and cooperative strategies
Competitive and cooperative strategies emphasize the competitiveness of the products and services offered by the business unit
- Functional strategy Maximize resource productivity
Focuses on functional areas, such as marketing and R&D to achieve business objectives
Each company chooses a strategy that best differentiates it from the competition, defines its market, and creates customer demand. Different business strategies and business models are possible for companies even when they are in the same industry selling similar products or services. For example, Southwest Airlines in the United States has a strategy based on providing low-cost transportation. The strategy for Singapore Airlines focuses on luxury and quality service.
The development of a business strategy is based on six building blocks: activity system view, innovation, value chain, sustained advantage, core competencies, and resource-based view.
Building Blocks of Business Strategy
Activity System View
Decisions about business activities must complement one another to yield a competitive advantage. A strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. An activity map connects the value proposition to the company’s assets, capabilities, and values.
Value Chain
A value chain consists of a series of activities that create value and culminate in the total value delivered by an organization. As seen in the figure below, a value chain depicts the way a product gains value (and costs) as it moves along the path of design, production, marketing, delivery, and service to the customer. Value is added by both direct and indirect departments or by both cost and profit centers. Value-chain analysis is a useful tool as a firm seeks to achieve competitive advantage.
Value Chain
Resource-Based View (RBV)
A resource-based view (RBV) is an approach to achieving competitive advantage. This view suggests that organizations should look inside the company to find the sources of competitive advantage. It is grounded in the perspective that a firm’s internal environment, in terms of its resources and capabilities, is more critical to the determination of strategic action than the external environment. Apple Inc. and Samsung Electronics are good examples of how two companies operating in the same industry achieve different organizational performance due to a difference in resources. Both companies have valuable resources that cannot be either imitated or substituted without great effort and risk.
To achieve a competitive advantage, the resource-based view defines characteristics as valuable, rare, inimitable, and nonsubstitutable (VRIN), as shown in the list below. Click on each characteristic on the left.
VRIN Model of Resource-Based View
- Valuable
Enables a firm to employ a value-creating strategy by either outperforming its competitors or reducing its own weaknesses.
- Rare
The price of the resource will reflect expected future above-average returns.
- Inimitable
Competitors are not able to duplicate this strategic asset perfectly.
- Nonsubstitutable
If competitors are able to counter the firm’s value-creating strategy with a substitute, prices are driven down to the point that the company’s profits decline.
Core Competencies
A core competency for a business is whatever it does best. It creates sustainable competitive advantage for a company and helps it branch into a wide variety of related markets. It is also hard for competitors to replicate.
Core competencies embody an organization’s collective learning, particularly of how to coordinate diverse production skills and integrate multiple technologies. They are the main strategic advantages of a business and include knowledge and technical capacities that allow a business to be competitive in the marketplace. Other examples of core competencies include brand recognition, marketing excellence, innovation, leadership, and customer service.
Sustaining Competitive Advantage
Sustaining competitive advantage means staying in tune with not just customer needs, but also with emerging technologies, government regulations, and the competition. For example, Blockbuster didn’t foresee the arrival of Netflix or the movies-on-demand models. In this case, there was no change in customer needs, but the technological advancement of network bandwidth allowed new competition to emerge from cable companies that could stream movies to homes. Earlier, the major computer company Digital lost its competitive advantage by dismissing the personal computer revolution led by Dell, Compaq, and Hewlett Packard.
Innovation and New-Product Development
Innovation and new-product development are integral parts of a business strategy aiming to build a sustained competitive advantage. Innovation and new-product development require a thorough knowledge of the target market, including its needs and wants. A systematic approach should answer several questions: What is the target market? What are the customer needs in this market? What is the customer value of my proposed new product? What sets this product apart from its competition?
The answers to these questions then need to be translated into the resources and internal capacity of the business and examined from the point of view of their alignment with the strategic mission. This process is shown in the figure below, Innovation and New Product Planning Framework for Business Strategy.
Innovation and New Product Planning Framework for Business Strategy
Sustaining Superior Performance
A firm’s ultimate goal is the lasting ability to outperform the competition. It impels the company to stay ahead of present and future competition and ensure market leadership.
A competitive advantage is an advantage gained over competitors by offering customers greater value, either through lower prices or by providing additional benefits and service that justify similar, or possibly higher, prices.
Strategy is about positioning your organization for competitive advantage. A strategy aims to offer customers greater value and service than provided by competitors and relates to choices on what services to offer and, therefore, how to allocate resources.
Managerial tools, such as quality management systems, operational efficiencies, financial control, human resource development (HRD) systems, sales, and marketing, help us perform better than competitors. They are necessary but are fairly easily imitated.
Whatever competitive advantage you may possess, whether one of cost leadership, differentiated products and services, specialized service in a niche market, or a combination of these, ongoing change in the environment and countermoves by your competitors will keep eroding your position. A company’s dominant position decays over time; it cannot last forever.
The company has to craft and implement strategies that sustain its competitive advantage. Creating a sustainable and superior performance is the most important area of focus for an organization. Your strategy, therefore, must serve a dual purpose:
- slow down the process of erosion by protecting current advantage against the actions of competitors
- invest in new skills and knowledge that will form a platform for the next position of competitive advantage
The essence of strategy—both in terms of what to do and what not to do—is to create barriers to imitations, an approach depicted in the figure below.
Strategy to Sustain Superior Performance
A sustainable competitive advantage may seem difficult to achieve. However, it has certain essential ingredients, as shown in the figure below.
Elements of Sustaining Superior Performance
People and their capability represent the source of most competitive advantage. Furthermore, a culture of innovation and accepting change, superior process that are difficult to imitate, knowledge management systems, technologies to support processes, capital to renovate and invest in new opportunities, and production processes that are environmentally sustainable comprise the foundational elements to achieving a lasting ability to outperform competitors.
- Locate and review your organization’s mission, vision, and core values. Apply what you have read to aid your evaluation of the strategic intent of your organization.
- Identify the competitive advantage of your organization. From your analysis of your organization’s competitive advantage, what is the biggest strategic challenge facing your organization?
Competitive Advantage
Competitive advantage is that which an organization does better than anyone else—something that is difficult or impossible to copy. People often think that a competitive advantage lies in the product an organization produces, but that is not necessarily the case. A competitive advantage could be from any or all of these factors:
- the product itself
- the organization’s brand
- a particular protected technology, if it results in the consumer seeing the product or service as better as a result of the technology
- a method used to produce the product or service that results in a cost advantage over other producers
- exclusive access to a particular market or set of clients
The condition of being difficult or impossible to copy is unequivocally critical—if any competitors can copy your advantage, you will not have an advantage for long.
Not every firm has a true competitive advantage; a true competitive advantage becomes the organization’s primary basis for strategic direction. In other words, if the firm has a true competitive advantage in, say, its brand, it may be able to translate this brand into additional products or ventures. Of course, the firm must carefully protect its competitive advantage so as not to dilute it or expose it to copy.
A competitive advantage may last only a brief time, or it may last a long while. The firm often does not necessarily control the longevity of your competitive advantage. Consider the following issues for each of the sources of competitive advantage listed above:
- the product itself—If you have a competitive advantage from the product itself, you will keep that advantage only as long as the consumer finds your product as superior to other alternatives. If the consumer decides that a different product better meets their needs (and you cannot control this), you will lose your competitive advantage.
- the organization’s brand—There are many brands that have tried to leverage their competitive advantage and actually ended up diluting it and destroying any cachet the brand had with consumers. There are countless examples of companies that had a distinct brand that then decided to grow very fast and ended with a brand that consumers no longer cared as much about: Consider Abercrombie & Fitch, Coach, Gap, Michael Kors, and Apple.
- a particular protected technology—It is not the technology itself that gives you a competitive advantage, but the way the consumer feels about the product or service as a result of the technology being a part of it. If a competitor comes out with a different technology that results in their product better meeting the needs of the client, your technology may no longer offer a competitive advantage.
- a method to produce the product—There is little that keeps other companies from copying your methods, but there are instances when competing companies could not culturally copy a method. In such cases, the competitive advantage was more permanent than would otherwise be thought possible. Consider Walmart: If Walmart has a competitive advantage, it comes from the company’s supply chain and logistics such that competitors simply cannot offer the homogeneous products at a better price. Note that this is very consumer-centric: Walmart’s customers consider price as the most important attribute in their shopping. Target and Kmart have struggled for decades to match Walmart’s supply chain capacity, but they have been unable to duplicate Walmart’s success. There is nothing inherently secret or different about Walmart’s logistics; competitors simply have not been able to culturally and organizationally position themselves to match Walmart’s logistic success.
- exclusive access—As long as exclusive access is maintained, usually in the form of a contract, it will be difficult for others to enter. However, without careful relationship management (non-exploitation) during the term of the contract, the contract may not be renewed and that competitive advantage will be lost that quickly.
As you can see, maintaining true competitive advantage requires hard work. The organization must nurture and care for its competitive advantage very carefully in order to not lose it, yet it must also use that same competitive advantage as the basis for its strategic growth.
Strategy that does not center on a competitive advantage is usually short-lived. By definition, that means strategy that could be copied by competitors or is not fully aligned with the customer’s needs.
Building Blocks of Competitive Advantage: VRIN
To describe the characteristics of competitive advantage, Michael Porter uses the acronym VRIN: valuable, rare, inimitable, and nonsubstitutable. Porter suggests, in essence, that the firm’s competitive advantage is truly a competitive advantage only if it is unique to the firm and can’t be copied by competitors. Let’s look at each characteristic individually:
- valuable—What the firm thinks has value is unimportant; what really matters is only what the market and/or consumers think. A competitive advantage can be based only on something that the market and/or consumers think has value. For example, many suggest that Walmart’s competitive advantage is that it has such strong control over its supply chain that it can offer very desirable prices for products. In other words, operating (overhead) costs are low enough that the consumer can receive a very attractive price for products. Here’s the question: Do low prices have value to the consumer? Clearly, the answer is yes. The competitive advantage Walmart owns enables it to offer lower prices is therefore “valuable.” Evidence suggests that in the United States, other large-scale retailers have been unable to develop the logistical expertise that Walmart owns. This is favorable, obviously, for Walmart, given consumers’ enjoyment of lower prices. A counterexample: If a wine company thinks its competitive advantage rests in the beauty of its label, it may be in for a rude awakening. While a beautiful label is important in the buying process, the contents of the bottle and quality are far more important; consumers may choose a bottle with an ugly label if they know the winery makes excellent products. Thus, thinking your label gives you a competitive advantage may not be a good building block for competitive advantage.
- rare—If the competitive advantage offers value to the client, that value also must be rare, meaning that other companies aren’t doing the same thing. Many business owners, asked about their company’s competitive advantage, state that it is their “customer service.” Great customer service is important to clients, but any competitor can offer great customer service relatively easily; it is not rare. An advantage is not an advantage if others do the same thing.
- inimitable—So you have a competitive advantage that is valuable and rare. But can competitors notice that competitive advantage and easily copy it? If so, it is not really a competitive advantage; others can quickly remove the advantage by copying it, and you are back to square one. When a company has an easily recognized brand, such as Coca-Cola, and that brand has positive consumer sentiment attached to it, this is a great competitive advantage, because it is valuable, rare, and inimitable. Other soft drinks companies have a very difficult time developing the same degree of advantage.
- nonsubstitutable—If the company or product doesn’t have many substitutes, that is ideal. The more distinctive the product/service is in consumers’ minds, the stronger the degree of competitive advantage will be for the firm. In the case of Coca-Cola, the product isn’t quite unique, which lessens Coca-Cola’s competitive advantage.
If a firm truly has a competitive advantage that meets these criteria, then it is a sustainable competitive advantage on which to build forward-looking strategy. If, on the other hand, the firm doesn’t have a true competitive advantage, it can consider strategies that will help it potentially build a competitive advantage based on these four building blocks. It can grow and build something it does well (but isn’t yet a competitive advantage) in a way that will enhance its value, its rarity, its inimitability, and its heterogeneity.
______________________________
- Determine the strengths and weaknesses of your organization. In addition, determine the core competencies your organization can build on to create competitive advantage.
- Identify the key organization processes. Use Porter’s value chain model to guide your analysis. Draw a diagram of your organization’s value chain.
Value Chain
The value-added chain is the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed, and distributed. The value chain shows the links, or chain, of the distinct activities and processes that a company performs to create, manufacture, market, sell, and distribute its product or service. The focus is on the activities that create value for customers.
Value-chain activities can be segregated to provide a detailed identification of a company’s activities and the capabilities that correspond to each activity. The value-added chain is best defined in terms of each link’s contribution to total cost. By comparing the costs incurred by each link and against competitors, the company can locate the critical success factors that must be addressed.
The importance of value-chain analysis is that it helps portray the costs in a company’s operations that might be impacted by a change in one of the chain’s processes. By comparing a company’s value chain to its competitors’, you can identify areas for improvement.
It is important to note that the value chain is influenced by the type of strategy the company and its competitors follow. If the company is a high-value, high-quality market leader, its chain will be different from the low-cost, high-volume competitor. These differences influence value-chain analysis. Companies must make sure that their business strategy is in tune with their strategic objectives.
The airline industry represents a good example of differentiation. Many airlines operate under similar circumstances and share similar cost structures and routes. Methods of differentiation can include lowest-price or on-time record, and areas such as boarding procedures, carry-on policies, airline miles, and social media can drive customer loyalty. The example of Southwest Airlines illustrates how putting people first creates a solid marketing position. It is important to identify the opportunities that increase a product or service’s perceived value to the customer (Smartsheet, n.d.).
Another example is the American steel industry, which consists of large, vertically integrated carbon steel makers. Some of the steel companies are integrated from ore mining to finished products. Their profitability has been threatened by mini steel mills and imports. Steel producers must choose either to reduce crude steel production and focus on flat and specialty steel products, or cut costs. The value-added chain is useful in identifying links that are not cost competitive.
For strategies driven by product differentiation, the value-added chain is best defined in terms of the contribution of each link to market value. This method helps identify the product attributes preferred by consumers and links them to the value-added activities in the chain that generate this attribute.
However, assets that underlie the production of these attributes cannot be easily redeployed along the value-added chain. There is also the risk of product or process imitation by competitors. Companies, therefore, often pursue different strategies. Analysis of value chains shows that strategy is not just about the selection of profitable product markets. It is also about investing in the links that generate the product attribute desired by consumers and which correspond to the firm’s distinctive competence relative to its competitors.
Depending upon the customer preferences and competitors’ strengths, the company can decide to redeploy its assets, pursue its traditional business, withdraw from the business, or make an acquisition of the critical assets.
The value-chain concept is thus useful in isolating the critical success factors of a strategy. For strategies in competitive industries, the chain isolates those links that are not currently viable relative to competition. For strategies of product differentiation, the chain indicates those links that generate downstream economic rents.
In the global context, the chain of comparative advantage for countries must be explored.
__________________
- Identify the key processes used. Where does your organization add value as a way of gaining a competitive edge? Only include those processes that are critical to gaining a competitive edge.
- Provide a summary of the core competencies, corporate structure, current leadership of the organization, and its operations.
Step 4: Summarize Financial Performance of Your Client
In the final step of completing your organization profile, briefly summarize the organization’s financials over the past three years. (Financial data and tables can be attached in an appendix. Appendices do not count toward the six to seven pages that you are limited to for this profile.)
Step 5: Analyze Trends in Your Client’s Industry
Understanding your client organization’s industry is essential to making useful strategy recommendations to Gustavo. You will develop a six- to seven-page analysis of the industry in which the organization belongs. Your industry analysis should incorporate the components described here and in Step 6.
You should appreciate that whatever happens in the industry will influence your client. Who are the competitors? Is it easy to start a business in this industry? Are there significant entry barriers? What are the dominant characteristics and current trends in your client’s industry?
Discuss industry size in terms of the number of companies, total employment, capital investment, major customers, and annual revenues. What are the driving forces of change in the industry, (e.g., innovation, technology, and buyer preferences and lifestyles)? State how organizations compete within the industry and identify the critical success factors in this industry.
Step 6: Apply Porter’s Five Forces Model
Complete your industry analysis by reviewing and applying Porter’s five forces model to your analysis. Tailor the Porter model to the industry and integrate the complete figure of the model within the narrative of the Project 3 report. What is the competitive structure of the industry? Describe the following:
- entry barriers—How difficult is it to enter this industry? Are there several players competing for profitability? Are there significant threats of new entrants?
- intensity of rivalry—Identify your client organization’s top three competitors. Discuss industry rivalry. Is competition intense?
- bargaining power of buyers—Who are the buyers in this industry? What kind of influence do buyers have on the competitors in the industry? Globalization makes it easier for buyers to source products worldwide. Is this the case in this industry?
- bargaining power of suppliers—Provide a profile of the suppliers. Suppliers with significant industry influence can play a major role in the marketplace. For instance, DeBeers, the world’s leading supplier of diamonds, has enormous bargaining power in the diamond industry.
- threat of substitutes—Carefully distinguish between similar products in the same industry. A substitute product for eye glasses would be contact lenses. Train travel is a substitute for travelling by car.
Project 3—Report Template
Memo: Please use this template
Maryland Creative Solutions
- Title page
- Table of contents
- page numbers for each major section
- Executive summary
- summarizes the results of your analysis belongs on a separate page from the introduction to the report
- Introduction (first page of report body)
- states the purpose of the report
- tells what the report will do
- introduces the industry and organization by name
- Analyzing organization’s resources and capabilities
- choice of organization
- organization profile
- Porter’s value chain analysis
- strategy and competitive position of the organization
- market and financial performance
- Understanding your organization’s industry
- trends in your industry
- Porter’s five forces analysis
- Conclusion
- One- or two-page summary of your analysis
- References
- APA-style reference page
- Appendices
