Impact of Data on Competitive Strategy

Impact of Data on Competitive Strategy Prachi Mankotia Will data transform competitive strategy? (A) Argue that competitive strategy, from the perspective of Michael Porter, is essential for firm success (hence Philip Evans is not correct in arguing that strategy is invalid). What is Strategy? Before explaining the concept of strategy, it is essential to highlight the term Value Proposition. A value proposition is a thirty-second elevator speech stating the specific benefits a product or service offering provides a buyer. It answers why the product or service is superior to competing offers. As such, the value proposition becomes a critical component in shaping strategy (Principles of Marketing, 2015). Strategy is often misinterpreted with aspirations, actions, and vision of the firm. It is interesting to note that many people say that it is our strategy to be number 1 or it is our strategy to grow, our strategy is to do international business, etc. but these are not strategies. Strategy defines the companys distinctive approach to competing and competitive advantages on which it will be based. Thinking strategically is the starting point to the firms success. The firms try to be the best in the market, be it the best car, the best toothpaste, or anything for that matter, but this is the worst error that firms make. They try to compete in the same dimensions. Instead, they should try to be unique. The process of strategic planning Strategic planning is a process that helps an organization allocate its resources to capitalize on opportunities in the marketplace. Typically, it is a long-term process. The strategic planning process includes conducting a situation analysis and developing the organizations mission statement, objectives, value proposition, and strategies (Principles of Marketing, 2015). A situational analysis includes analysis of both internal and external factors. Organizations conduct SWOT analysis based on this situation analysis. The strengths and weaknesses depend on the internal factors whereas the opportunities and threats depend on the external factors. Once a company has analysed its internal and external environments, managers can begin to decide which strategies are best, given the firms mission statement. This is a very broad model but Michael Porter came up with a better model to make this concept clear. Competitive strategy: essential for success of the firm A companys economic performance results from two different causes, one being the industry structure and other strategic positioning within the industry. Strategic thinking must encompass both these factors. Michael Porter developed an approach for analysing industries and the model was called the Five Forces Model (Porter, 1980). This model helps the firms to identify their current competitors as well as those who can be competitors in the future and firms can find the best way to position themselves in the industry. The second part in strategic thinking is the strategic positioning which means achieving superior performance within an industry. Only two ways can achieve profitability; by being able to command a higher price(differentiation) or by being able to produce an equivalent product at lower cost. So, the firm needs to identify its root to competitive advantage. With this comes the concept of value chain. Value chains is the set of activities that the company does to deliver value to the customers. All competitive advantage resides in the value chain. Strategy is manifested in choices about how activities in the value chain are configured and linked together. Often, operational effectiveness is presumed to be a strategy but it is not a strategy. Though it is a necessity but it not sufficient for the company to be profitable eventually. This is because over long run, the competitors will figure out the companys best practice and then it will be hard to be distinctive. This is also known as strategic convergence which leads to lower prices and no one is profitable, all try to stay in the game. Therefore, the company should consider strategic positioning because it presumes that the company is operationally effective. It is about making choices to be unique, to be different to meet different needs to the set of customers that the company chooses to target. Some examples of competitive strategy This section of the paper illustrates examples for both industry structure and strategic positioning within an industry, which are essential for the success of the firm. Airline industry vs Business Software industry Michael Porter gives an example of the industry structure using the Five Forces Model (Porter, 1980). He explains that for any industry to attain average level of profitability, it is essential to understand the fundamental structure of forces. The airline industry has horrendous profitability since decades because of unattractive industry structure. It is very easy for customers to switch airlines; the airframe and engine manufacturers also have a lot of power and there are high levels of rivalry because of costs being fixed. Many few airlines make money and even they dont make it for a long time. Business software industry, on the other hand, has a very attractive industry structure. This is because it becomes very difficult for the customers to switch from one software to the other. The costs of producing a software and bringing it up is also very high, so there are not much substitutes. This makes the software industry very profitable. This is not random and it is very important for the industry to understand the underlying structure to make profits and succeed. IKEA: Furniture Retailer Company This example portrays all important attributes that a company needs to cover to create a successful strategy. The very first attribute is to have a unique value proposition, i.e., who are your customers, what are their needs and what relative price you must offer. A strategy is when a company competes to be unique. The value proposition of IKEA includes customers who seek quality and sophisticated design but at a very low price point. They have a wide array of stylish and space efficient furnishings. They made many key choices in the value chain to be unique, and that is what a strategy is, a combination that suits your companys value proposition. IKEA delivers its products in a box, there is no fixed furnishing, everything is dismantled and packed compact in a box. Another attribute to strategy is to make clear trade-offs and choosing what not to do. Part of a successful strategy is that a company cannot seek to make everybody happy, it must choose its target market and focus on the ir needs and not compromising on certain factors to include everybody. Michael porter also makes it clear that a company shouldnt imitate IKEA because in this way, it might be altering the advantages it has. No one can imitate them because strategy is about making choices and tying them together to benefit the organization. Another attribute to a successful strategy is how the activities in the value chain are connected. Like in IKEA, all its activities are mutually connected, their design, production, the way they do logistics, etc. This is another reason no one can copy a good strategy because for that everything needs to be copied which wont work because the company from whom youll be copying, is doing that for a long time now. The last attribute that makes a successful strategy is that change is continuous but not change in strategy, not change in value proposition. Conclusion All the above examples and concepts clearly indicate that a strategy is often misinterpreted with a firms aspirations, visions, and actions. A strategy is the means to get to those aspirations, it is the core understanding of distinctive issues, it is the set of choices a firm makes to deliver those values. Thinking strategically means to compete to be unique and not the best. Strategy is about making choices, and with choices comes trade-offs. A good strategy is a unique set of choices made from the value chain that Michael Porter has introduced and a competitive strategy leads to a firms success. Phillip Evans mentioned his point of data taking over strategy but even he is not sure of it. He quotes value chain can breakup but not necessarily. His views are based on assumptions whereas Porters view proves that competitive strategy is essential for the firms success. Moreover, data can help a firm to increase its potential for competitive advantage, but Porters value chain is important for a firm to decide the combination of choices to make to use its competitive advantage in the right direction to achieve success. Therefore, it is evident that Competitive Strategy, from the perspective of Michael Porter is essential for firm success. References Principles of Marketing (2015). University of Minnesota Libraries Publishing edition. https://youtu.be/KvYwKM5bY0s http://www.ted.com/talks/philip_evans_how_data_will_transform_business http://www.ifm.eng.cam.ac.uk/research/dstools/porters-generic-competitive-strategies/ http://www.investopedia.com/terms/v/valueproposition.asp https://www.information-management.com/opinion/big-data-and-analytics-help-business-transform-and-gain-competitive-advantage