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Strategy Development

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The analysis phase has now been completed and its time to start developing your strategy.

Before you are going to formulate your strategy, it is however necessary to study and apply the strategic tools of "The Five Forces Model" and "The Activity Cost-Chain". These two very important strategic tools will help you to summarize and present all the information gathered in the analysis phase in a sensible manner. You can also view this process as data being transformed into useful information.

The information provided by the "five forces model" and the "activity cost-chain" will enable you to formulate your strategy more effectively. Let's start this phase by studying the strategic tools to see how they work and how to use them.


The Five Forces Model of Competition

Although each industry has its own particular set of competitive characteristics and "rules of the game", there are enough similarities in the nature of competitive forces from market to market to allow the use of a common analytical framework. Generally speaking, competition in the marketplace is a function of five competitive forces.

The five forces model is a welcome ally in putting together a picture of the nature and intensity of competition in an industry - indeed; it is the best single tool for understanding the complexities of how competition works.

Professor Michael E. Porter of the Harvard Business School developed this model.

These famous five forces are:

The force arising from suppliers

The force created by your customers

The force from potential new entrants

The force from substitution products

The force from your competitors

The real challenge in formulating a winning competitive strategy, is how to gain an edge over rivals, given that the success of any one firm's' strategy hinges largely on what strategies its rivals employ; in conjunction with the resources they are willing and able to invest.

The Strategic Implications of the Five Competitive Forces

Analysis of the competitive environment requires that the strength of each one of the five competitive forces be assessed individually. The collective impact of these forces determines what competition is like in a given market and, ultimately, the profit that industry participants will be able to earn.

As a rule, the collective profitability of participant firms decreases as the competition intensifies. From a business perspective, the sternest and most brutal competitive condition occurs when the five forces combine to create pressures so sever, that the industry could even loose most of the firms involved.

In coping with the five competitive forces, it will make sense for you to search out a market position and competitive approach that will:

Insulate you as much as possible from the forces of competition.

Influence the industry's competitive rules in your favour.

Give you a strong position from which to "play the game" of competition as it unfolds in the industry. (Remember, to do this you'll require analysis-based judgments about what the competitive pressures are and will be, what their origins are, and how they can be defended against or otherwise tolerated.)

Strategic Activity-Cost Chains: Tools for Assessing Relative Cost Positions

Along with an assessment of competitive forces must come an assessment of the relative cost positions of the firms in the industry (if not every firm, then certainly how one's own firm measures up against key rivals).

Strategic Cost Analysis focuses on a firm's relative cost position vis-Ðo-vis its rivals. The primary analytical tool of strategic cost analysis is a completely integrated activity-cost chain showing the components of costs, all the way from the purchase of raw materials to the end price paid by customers.

The task of constructing a complete cost chain is not easy. It requires breaking a firm's historical cost accounting data down into several principals cost categories and also developing cost estimates for the channels for getting the product to the end-user as well.

In addition, it requires estimating the same cost elements for rival firms and estimating their cost chains - an advanced art in competitive intelligence in itself. Despite the tedious nature of the task and the imprecision of some of the estimates, the



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