The challenges posed by globalization:
The impact of globalization in the period of 1980-1996 has resulted in the change of business environment. It has posed 5 different challenges in the strategic management of the business, these challenges are (1) Increased Competition, (2) Reduced Profit Margin (3) Shortening Product/ service life and development cycles(4) The role of ICTs in supporting and enabling business processes (5) The need of increased flexibility.
Product life cycle:
Product life cycle concept can be used to face the challenge posed by the increased competition in the business environment in the period of 1980-1996.
The Product life cycle concept can be used to analyse and predict competitive conditions and identify key issues for management. Competitive conditions are characterized for different stages, introduction, growth, maturity and decline of the products’ life cycle.
The challenge of reduced profit margin can also be overcome by using the product life cycle concept. At the introduction stage (Campbell, 1999). ‘elasticity of demand’ is identified as a key factor affecting profitability. ‘Entry price’ for the product is a key issue for the management. If the elasticity is low then ‘skimming’ is indicated.
The growth stage is considered as a high profit stage owing to high sales. At this stage it is important to identify when to stop continuing ‘milking’ where high sales have already been achieved.
The maturity stage is characterized as a stage where profitability is obtaining by customer retention. The key factors which can earn customer loyalty are free services and/or customer rewarding.
At the decline stage the sale of the products decline therefore profits decline. At this stage businesses have to find a way to reduce investment to maximise profit without compromising the loyalty of customers.
Generally, modelling a company in terms of the life cycles of its products or services leads to a direct way of addressing and tackling reduced profit margin in the business organisation.
The emerging role of ICTs within the business organisations are countered successfully by life cycle analysis via creation of definition of each stage. It then becomes easy to specify how ICTs can be used at each stage of lifecycle.
As EWB discuss at the introduction stage the focus of ICT will be on market research and product development. But at the declining stage the focus of ICT will be different.
The challenge of the need of increased flexibility is tackled by product life cycle analysis when it helps tackling the shortening development life cycles by implementing parallel processing and multi-disciplinary teams. The life cycle concept also generates increased frequency of decision making as it prompts quick changes to face the changing market environment.
The five different challenges posed by modern day business environment have been tackled by portfolio theory in the following ways:
Campbell (Campbell, 1999) says a broad portfolio underpins the concept of spreading risk and opportunities. It offers the advantage of strength so that a down turn market will not threaten the whole economy.
In an increasingly competitive environment, this concept of spreading risk and opportunity can be utilized so that if one product fails in the market the other product will help the business to recover from the loss.
The portfolio analysis which is closely related to life cycle analysis takes the help of BCG matrix to explain its analysis process. BCG matrix is based upon the fact that a market share in a matured share is correlated with profitability. It also comments that it is less risky and less expensive to win a market share at the growth stage as it’s easier to get new customers rather than getting customers to switch products.
The BCG matrix requires continuous monitoring of the market performance of the product, in response to their shortening life cycles. It is critical to know exactly at what stage the product life cycle is at any given time. BCG matrix uses marketing expenditure to detect market changes.
Since the BCG matrix uses the product life cycle theory in its portfolio analysis, the characters that exist in the life cycle analysis also exist in the portfolio analysis. Therefore, the applications of ICTs help in gaining optimal support of each product and support in the company portfolio.
The use of BCG matrix entails increased frequency of decision making, resulting more frequent organisational change and by stimulating necessary organisational flexibility to cope with the change.
Competitive Forces Analysis:
Competitive forces analysis tackles the challenge of modern business environment by holding the concept of ‘barriers’ in the business environment.
The concept of barriers is applied in different circumstances and allows an organisation to take advantage of opportunities and avoid the threats. Few circumstances that are considered in a competitive forces analysis are capital costs of entry- easy enough to apply, if there is a high cost for the product the barrier is high, similarly, if the brand loyalty is high in an existing market, the barrier is also high, as it’s going to be hard to get the customer switch the products.
Price is another difficult but important issue, if the product has a low price in the market, then the barrier is high, as it’s going to be difficult for an organisation to enter market with a low price while its market share will not be big. It will need a big investment to get the breakeven and then to make profit.
Competitive forces analysis is always applied from the perspective of an existing player in the market rather than a new entrant. Reason for that is, the concept of competitive forces analysis was developed during the period of 1980s when the existing big players in the market was finding it hard to compete with the new entrants of the market.
In the porter’s five forces framework and profitability (Campbell, 1999) an attempt has been made to relate company’s potential profitability and the five forces in the business environment. It identifies potential situations of high profitability for business and decides which to invest in. The five forces framework uses the concept of CFA ‘barrier’ theory and comes to conclusion that a high rivalry in an existing market will increase competition and will reduce the profit margin.
The role of (Edwards, 1995) ‘Strategic IT’ in competitive forces analysis is quite important as it can be used to alter each of the 5 forces in the framework to increase company’s profitability.
However the CFA fails to provide any solution for the Shortening life cycles and need for increased flexibility.
Value Chain Analysis:
The Value Chain Analysis (VCA) supplies a unique abstract concept. The value chain consists of (1) Value added, (2) the business activity which transforms the inputs into outputs and (3) chain of business activities which is the most unique of all.
The value chain analysis models the business environment in two different forms, external VCA- applies the concept of value chain to supply chain and internal VCA- applies the concept of value chain to company’s internal business.
The managers use the abstract concept in relation the model in order to tackle challenges posed by globalization both directly and in combination with other concepts.
The external value chain applies the concept of value chain to the supply chain which consists of business environment; therefore it tackles the challenges posed by the increased competition.
By applying the concept of value chain to the supply chain an organisation will be in competition with other supply chains within the business environment. By reducing the cost of adding value at each stage in the chain, organisations can sell goods or services at the same or cheaper than other chains to generate more profit. Thereby the external VCA claims to tackle the reduced profit margins while tackling increased competition.
Within the internal VCA the electronic data interchange (EDI) between computer systems has enabled sharing information systems as well as information. This implies the significance of ICT in cost reduction. The role of ICT is also important in external VCA while it shares information with its trading partners.
The internal IT systems imposed by external environment makes the system rigid which is not a characteristic of flexible organisation. To solve this problem the business process had to be redefined and recreated. Another attempt to promote flexibility within the organisation was the use of object oriented software development and using the web as new channels of business communication.
The use of IT systems especially EDI and the web have made the flow of information internally and externally very fast. Therefore, the response to any change due to the shortening of product and service development and life cycles has been easy to tackle.
Webster, F. (1995). Theories of Information Society. London: Routledge.
Campbell, D. Stonehouse, G. & Houston, B. (1999). Business Strategy: An introduction. Oxford: Butterwoth Heinemann.
Edwards, C. Ward, J & Bytheway, A. (1995) The essence of information systems. London : Prentice Hall