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Introduction
A business strategy provides a firm with an elaborate framework for evaluation of its ideas/projects with regard to their strategic value. In most firms, the frameworks for implementation and evaluation of strategy are largely lacking.
Strategic value goes beyond strategy; it encompasses ideas that give the firm comparative advantage (Campbell, Goold & Alexander 1995).
Comparative advantage, unlike competitive advantage is based on the net present value (NPV) concept; a concept whereby, in response to competition, a firm initiates and implements new projects.
Generally, a viable project is one which, if implemented, generates high stakeholder wealth hence adding strategic value to the company.
To achieve strategic value, a company must improve on the existing project strengths, minimize project weaknesses, reduce risks and develop new ideas/opportunities (Campbell, Goold & Alexander 1995).
Based on these factors, it is evident that, for a new project to be termed successful, its strategic value to a company must outweigh its implementation cost.
This paper assesses the statement that for a project to be successful, it must be aligned with its strategic value. Using examples, the paper evaluates different business models that prioritize particular business activities based on their economic value to the firm.
Strategy and Competitive Advantage
Strategy encompasses all business actions a company takes to gain competitive advantage in a given industry (Porter 1996, p. 64). Superior quality products or services offered at affordable prices enhance a firm’s competitiveness.
It is the superior value that increases a firm’s market share and profitability. For example, it was the need for an improved search engine that drove Sergey Brin and Larry Page to develop Google. Also, Henry Ford was motivated by the desire to produce reliable, superior quality vehicles to customers.
Most firms aim to provide products or services that meet consumer needs; profit comes as a consequence of creating a high-quality product or service (Arthur 1996). This implies that strategy entails creation of value at a reduced cost.
Besides value creation, strategy sometimes involves co-operation between firms. The co-operation helps firms to achieve common strategic objectives (Christensen & Raynor 2003).
For example, three rival companies, Sony, Toshiba and IBM, cooperated in creating the PlayStation 3 microprocessor cell. Besides co-operation, most firms enhance their competitiveness through product and price differentiation.
To accomplish this, firms often adopt measures that enhance their strategic positioning (unique positioning) within a given market segment (Rayport & Sviokla 1995).
Strategic positioning enables firms to offer value to a particular market segment, while at the same time minimizing associated costs. An example is Neiman Marcus, a retailer, which, besides having a clear strategic positioning, targets the luxury market segment.
As stated by Collis and Rukstad (2008), strategic positioning goes beyond planning future business activities; it includes what not to do during project implementation.
Since capital and financial resources are limited, project managers must carefully examine different business strategy options and select the best one. Inappropriate business strategies lead to low performance.
For example, in response to Southwest Airline’s low-cost strategy, the Continental and Delta introduced a low-cost package besides its strategy of covering many destinations (Porter 2008).
However, this differentiation strategy could not help Continental and Delta to wrestle the market leadership from Southwest Airlines.
Strategic Value in Project Management
Strategic value can be viewed as the managerial theory that allows firms to gain and maintain competitive advantage in a particular market segment.
It is based on assumptions about the prevailing competitive conditions i.e., the comparative value of a firm in terms of its resources compared to the resources or the actions of its competitors (Drucker 1994).
It is on the basis of projections about the competitors’ actions or abilities that a manager can initiate and develop strategies that will give a firm competitive advantage over its rivals.
One way a firm can achieve strategic value is by aligning its abilities, resources and corporate relationships with industry trends so as to capitalize on available opportunities. Therefore, strategic value basically provides a roadmap on how to gain and maintain competitive advantage.
Accurate predictions would mean better strategic decisions. It is through feedback from customers and industry players that managers learn to validate or adjust their assumptions regarding a firm’s strategy (Porter 2008).
For instance, in 1993, Apple Newton, a new PDA product in the market, failed to perform well because of high pricing (over $1000).
Other products introduced later including Blackberry, Visor, iPad and iPhone, were sold at a relatively low price, which contributed to their high performance in the market.
It is through product performance in the market that managers are able to evaluate the effectiveness of the company strategy with respect to gaining competitive advantage.
Therefore, maintenance of strategic value must involve intertwined steps of formulation, feedback, analysis and implementation.
Walmart, a onetime leading retailer, achieved its leading position largely because its founder, Walton, was able to make correct assumptions about the relationship between low pricing in suburban areas and mass-merchandising (Rayport & Sviokla 1995).
Thus, Walton’s strategic decision to target the underserved areas gave Walmart a competitive edge over its rivals in the retail industry. The firm later adopted an IT system that allows real-time tracking of deliveries and sales.
These changes saw Walmart’s stocks increase by 18 percent in 2008, while stocks of other blue chip companies such as Dow Jones Industrial declined by 34 percent (Rappaport 1992).
Therefore, strategic decisions at corporate level must reflect the existing dynamics and realities of the target market segment. Walmart’s strategy was that of low-cost pricing, which reflected the economic realities of the time.
In contrast, unrealistic assumptions about competitive advantage will result to an ineffective company strategy that will destroy strategic value and affect a firm’s performance.
The automobile manufacturers GM and Ford have often been affected by the decline in gas prices because their strategies were based on incorrect assumptions that gas (gasoline) prices would not increase and the demand for sports vehicles and trucks would continue to rise.
However, in 2008, gas prices rose significantly (from a low of $2.50 in 2007 to $4.50 a gallon in 2008) forcing buyers to opt for fuel-efficient vehicles. Since the GM and Ford strategies were based on incorrect assumptions, the firms could not create strategic values for their products.
By comparison, in 1997, Japan’s Toyota developed large and fuel-efficient car, the Prius, which could compete effectively in times of high fuel prices (Porter 1996). Thus, the flawed strategies in GM and Ford led to limited competitiveness, loss of strategic value and low performance.
Consequently, in 2009, GM went bankrupt while Ford adopted turnaround strategy, which has enabled it to make a slow comeback in the automobile industry.
A firm’s performance is largely determined by its manager’s actions (firm effects). Firm effects have more impact on performance than a firm’s external environment.
In his study, Kotter and Schlesinger (2008) found that industry and strategy determine 20 percent and 45 percent, respectively, of a firm’s profitability. Thus, a firm’s industry also influences its performance. Good managers create value by combining strategy and industry effects.
Creating strategic value depends on the managers’ decisions about the type of industry a firm operates in.
It requires continual improvement on a firm’s strengths, identifying opportunities and avoiding internal and external threats. For example, there were concerns whether Toyota could continue producing quality yet low-priced vehicles (Porter & Millar 1985).
Korea’s Hyundai stepped in to fill this void, establishing a strategic position in this industry; it focused on certain trade-offs with an aim of producing low-cost, luxurious and quality vehicles.
This case in the automobile industry indicates that strategic value is not constant; it may be easier to gain competitive advantage but it is increasingly difficult to maintain it. In light of this, the business models of successful firms can aid managers to create and maintain strategic value in a firm.
Business Models in Strategic Management
As stated earlier, a strategy is a theory or roadmap developed by managers to help a firm gain competitive advantage in a given industry. However, its effectiveness cannot be determined unless it is put into action.
A business model facilitates the translation of strategy into action by specifying the initiatives and competitive actions of a firm (Kotter 2007). In other words, business models describe how firms aim to generate wealth or value.
If the business model is flawed, the firm’s performance and profitability will decline and hurt the firm. To formulate an appropriate business model, a firm first creates a blueprint based on its manager’s theory or strategy (Evans & Thomas 1997).
The blueprint has specific actions that support the manager’s theory or strategy. The next step involves the implementation of the blueprint in the firm’s procedures and processes.
A popular example of a business model is the razor-razor model, which is based on the idea that a firm should sell its products (with replaceable parts) at a lower price and benefit through the purchase of replacement parts.
The idea was developed by Gillette. While Gillette’s sold its razors cheaply, the firm reaped from the replacement cartridges that were relatively expensive.
The model has had many applications in today’s business environment. An example is HP, which sells its printers at lower prices while the replacement cartridges are relatively expensive.
In the telecommunication industry, some companies use the subscription-based model in conjunction with the razor-razor model, whereby they sell cell phones (smart phones) at a low price but require buyers to sign up for a service plan extending for up to two years.
In this way, they are able to recover the money used to subsidize the cell phones. The subscription-based model has been successfully used by Audible, a distributor of audio books.
Also, Google and Microsoft have used two contrasting business models in their quest for dominance in the software industry. Initially, Google only offered a search engine but later moved into software development.
It now provides a number of applications such as email and Google Docs as well as operating systems such as Android and Google Chrome. On its part, Microsoft, which initially offered the Windows operating system, now offers applications such as Bing and Office Suite.
Market Dominance
In attempting an entry into each other’s territory, Google and Microsoft have adopted contrasting business models. Google offers its applications including Google Docs free of charge to reward customers who use its search engine.
The company benefits through the advertisements and sponsored links on its search engine. Google, in turn, uses the money earned from these ads to support free applications such as Google Docs.
Thus, its business strategy is to give free applications to attract many users and later benefit from advertisers targeting the online market. The profits generated from the advertisements enable Google to offer service/products that compete with software/products provided by Microsoft.
On its part, Microsoft uses a business model that emphasizes on applications associated with its Windows operating system (OS). Currently, its market share in the OS market stands at 90 percent.
Most PCs come with pre-installed Windows OS and the user has to purchase Windows applications that go with it such as the Office Suite. Additionally, the users have to occasionally upgrade this application.
Microsoft uses profits accrued from these transactions to offer free search engine, Bing, to users. Bing, unlike Google search engine, is relatively unpopular. So, Microsoft does not benefit from this product; rather, it offers it freely to rival Google’s dominance in the online search domain.
In contrast, Google offers Google Docs to rival Microsoft’s perceived dominance in the applications sub-sector. Thus, the two technology firms employ different business models to add strategic value by offering directly competing products.
The Modern Business Environment
In the modern economy, the marketplace is increasingly competitive. The advancement in technologies has had a dramatic impact on all industries. The rapid change in technology coupled with globalization has revolutionized strategy formulation and implementation.
The new technologies such as cell phone have relatively high diffusion rates. Two factors explain this trend; first, the presence of well-developed infrastructure facilitates rapid adoption of new technologies.
The second reason is that new business models adopted by technology firms facilitate the diffusion of such technologies. For instance, Dell adopted a unique business model, the direct-to-consumer approach, to enhance accessibility of PCs to the masses at a low price (Hart 1997).
In the retail sector, Walmart used its elaborate technological systems to increase the accessibility of its products to suburban consumers.
Strategy formulation in the modern business environment essentially covers a firm’s strategy on value creation and on how to compete. It entails three distinct levels; functional, corporate and business (Hart 1997).
Strategic decisions about the industry, region or market a firm should target make up the corporate strategy of the firm. The purpose of executive-level strategies is to add overall strategic value to the firm.
For example, IBM has undergone many transformations because of the strategies made at the corporate level (Hart 1997).
Initially, IBM was a hardware manufacturer; however, corporate-level strategies have transformed it into a software company, with the hardware unit, Lenovo, sold to an overseas company.
To add strategic value and compete effectively, some firms break-down their corporate strategy into strategic business units (SBUs), each headed by a general manager (Malone, Yates & Benjamin 1989).
For IBM, its four SBUs include software, hardware, financing and applications divisions. In each unit, the general manager formulates a strategy that would add strategic value to the company and enable it to compete effectively.
References
Arthur, W 1996, ‘Increasing returns and the new world of business’, Harvard Business Review vol. 56, no. 7, pp. 100–109
Campbell, A, Goold, M & Alexander, M 1995, ‘Corporate strategy: The quest for parenting advantage’, Harvard Business Review, vol. 73, no. 2, pp. 120-132
Christensen, M & Raynor, E 2003, ‘Why hard-nosed executives should care about management theory’, Harvard Business Review, vol. 32, no. 5, pp. 1–10
Collis, D & Rukstad, M 2008, ‘Can you say what your strategy is?’ Harvard Business Review, vol. 86, no. 4, pp. 82-90.
Drucker, P 1994, ‘The theory of business’, Harvard Business Review, vol. 41, no. 9, pp. 95–105
Evans, F & Thomas, S 1997, ‘Strategy and the new economics of information’, Harvard Business Review, vol. 22, no. 2, pp. 70-82
Hart, S 1997, ‘Beyond greening: Strategies for a sustainable world’, Harvard Business Review vol. 78, no. 8, pp. 231-237
Kotter, J 2007, ‘Leading change: Why transformation efforts fail’, Harvard Business Review, vol. 85, no. 1, pp. 96-103.
Kotter, J & Schlesinger, L 2008, ‘Choosing strategies for change’, Harvard Business Review, vol. 86, no. 7, pp. 130-139
Malone, T Yates, J & Benjamin, R 1989, ‘The Logic of Electronic Markets’, Harvard Business Review, vol. 17, no. 6, pp. 167-170
Porter, M1996, ‘What is strategy?’ Harvard Business Review, vol. 74, no. 6, pp. 61–78
Porter, M 2008, ‘The five competitive forces that shape strategy’, Harvard Business Review, vol. 86, no. 1, pp. 78-93
Porter, E & Millar, E 1985, ‘How Information gives you Competitive Advantage’, Harvard Business Review, vol. 16, no. 3, pp. 149-160
Rappaport, A 1992, ‘CEOs and Strategists: Forging a Common Framework’, Harvard Business Review, vol. 70, no. 11, pp. 84-91
Rayport, F & Sviokla J 1995, ‘Exploiting the Virtual Value Chain’, Harvard Business Review, vol. 45, no. 4, pp. 75-85
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