Strategic modeling is the process by which an organization more precisely defines success in the business context.
It includes the strategic profile. The elements of this profile include risk orientation, the approach to the competition, and the expression of the main indicators.
The strategic profile should define the activity in which the organization wants to be within 3 to 5 years in the future, including the most important indicators of success – profitability, market penetration, liquidity, and more.
Here a model for a future organization can be applied, determine the amount of organizational risk that will be included and how other important areas of the organization’s activities will be managed.
The specific products and services that the organization intends to offer and the individual markets in which they will be offered must also be identified. An exemplary strategic profile of a company may include: increasing profits by 15% per year for 5 years.
Once this goal has been established, the second part of the model is to define how to achieve it. This stage can be considered in a short phase called the integration of functional plans.
Consideration will include: delineating the pathways considered to achieve each of the objectives, analyzing costs and revenues for each of the objectives, and selecting individual strategies.
A cost-revenue analysis is extremely important as in an organization that sells products or services, the risk is often defined as an increase in market share. Because growth requires initial costs, profits are not guaranteed immediately.
The strategic planning team must determine how much the organization will need to spend to achieve this market share. Risk orientation is influenced by mixed forces. Reference: “Creating a strategic plan of the organization and control of implementation”, https://brightonbot.com/creating-strategic-plan-organization-implementation/
The market may dictate high or low levels of risk to those currently occupying market share or potential future ones.
High-risk markets are those markets dominated by two or three leaders that are often in fierce competition with each other.
When an organization intends to attack a market with this type of risk, those responsible for the decision must determine the magnitude of the risk, the payback on success, and whether the organization can fail in that market. Risk orientation is further influenced by internal forces for the organization.
The manager must determine his attitude to risk and decision-makers who want to take a risky position. Another important aspect of strategic modeling is defining the organization’s attitude to competition in the markets in which it will compete.
Michael Porter’s model of competitive strategy has become the standard in this area. The following requirements are extremely important for the success of strategic modeling:
- 1. The modeling must be consistent and based on the defined values and opinions of the organization.
- 2. It must be built in the context of the future: although no one can fully predict it, it is possible to perceive significant aspects of the future, to conceptualize the desired end phase of the organization that takes these aspects into account, and to work actively in this way. The organization is responsible for the future and should not delegate this responsibility to external forces.
- 3. Strategic modeling involves creativity and the free generation of ideas with many alternative possibilities. The organization is most likely to succeed in this phase when there is maximum creativity within realistic limits.
The portfolio model of the strategy was developed by the Boston Advisory Group and is often referred to as the “Bee Sea Matrix. G ”The model considers as a decisive factor the investments that the organization has made in various lines of business.
The goal is to help managers make decisions about deploying resources in each business district or product line owned and used by the organization.
The classification of business areas is according to two variables: market growth rate and market share, which within the matrix leads to the definition of four strategic types: stars, dairy cows, question marks, and dogs.
Each strategic type describes a different level of development, which has unique conclusions about the cash flow and profit of the organization. The Boston matrix is divided into 4 quadrants, each of which is named according to the type of business.
“Star” is a business district with high market growth and a relatively wide market share.
As a rule, this is a product or organization that has high growth potential and needs very short-term amounts to maintain high growth. It has the potential to increase sales and generate large amounts of profit in the future.
When the level of market growth slows down and the need for fast and significant investment ceases, the “stars” must become a significant generator of money, but before reaching this position they need long-term investment and marketing assistance to maintain their dominant market. title.
The “stars” are significantly important for the business because the future cash flows depend on them. If the level of market growth eventually decreases and high market shares are reached, they will gradually become “cows”. One of the big problems that companies may face is a large number of “stars” without the necessary cash flow to support them.
This may be due to many reasons such as changes in technology or failure to anticipate the time it will take to bring the new project to fruition.
The company will expend a lot of energy to reach this market share and will consciously take the risk that the product may not generate adequate profits during this time. In this situation, managers can choose to either finance the “stars” through equity or sell some of them and use the sales resources to finance others.
What they cannot do, hoping for success, is to avoid the selection process and stop funding.
The “dairy cows” occupy the lower left quadrant of BM. This is a business district or product line in a well-developed industry.
The business has a wide market share but has slow growth. This generally means that the activities are guaranteed and stable in their markets, enjoy great customer support, and have a high level of profit.
Large accounts, frozen cash can be turned by a dairy cow to catalyze funds in new business districts or products that have high growth potential but are bad at cash.
Cows are very important because they generate significant cash surpluses that can be reinvested in new activities, development of existing ones, merging activities successfully enough, as well as to finance the management of the company, to repay loans.
At some future point, new technologies or new market participants will undermine the stability of cows, when this happens they move down to the bottom in the right quadrant of the matrix, characterized by absolutely low or low growth and declining market share.
Their stability can be maintained for a while with more innovative market incomes. Cows have a special accounting system that emphasizes cost control rather than profit control.
The lower right quadrant of BM is occupied by “dogs” and is characterized by both low market growth and small market share. They follow the strategy of high product diversification, in all probability, they will have significant shortcomings compared to the big competitors.
The only bright spot is that the low overall rate of market growth means that the overall cash flow inflowing the necessary funds for new investments is likely to be low, which is difficult to see even if this low level is justified.
The manager must try to sell the business district to another company or liquidate these assets.
Withdrawal of investment and complete cessation of the investment process should be the only or best option for dog companies in their business or product portfolio, but even if not used, it should always be on the agenda. In the upper right quadrant are the question marks, which are characterized by high market growth but low market share.
Its shortcomings in terms of costs, compared to market leaders, show that the higher the required capital to maintain market position, the lower their experience, which means that their relative costs are higher.
They can consume an embarrassingly large amount of money. On the other hand, when market development is high and there is still a real opportunity to increase the share and gain relative experience in the developing market, there are no the same barriers for competitors.
Leaders’ cost advantage is less when they have relatively less experience in this newly evolving field.
Managers must decide when to invest more capital in business districts or products to have the benefit and opportunity for high growth, ie to transform into a star or not to invest to emphasize another business district or product in the portfolio.
In both ways, managers face some risk by making large investments that can lead to losses or the rejection of an opportunity that may later turn out to be profitable.
The company’s products according to the strategic types
The company’s products according to the above 4 strategic types have characteristics: the star product gives a large income, but requires significant investments; the dairy product gives a high income and is characterized by low costs in terms of market stability; the question mark product brings a small income, but can become a star with additional investments; the dog product brings little income and requires small expenses, but there are no prospects and the desire to be stopped from production.
Portfolio analysis involves assessing the capabilities of the organization on 2 criteria:
- the growth of the market, measured by the absolute volume of sales and the rates of this growth, and the size of the market share controlled by the organization, measured as a percentage of the total volume of sales on this market.
The great advantages of BM as a model are:
- focuses attention on the ability of the activities to earn money and allows the management to decide how best to distribute this money and other resources between the activities in the company;
- a useful tool is in supporting the development of strategies for maintaining a long-term increase in the portfolios of individual activities;
- provides good assessments of both products and activities and is therefore applicable at different levels within the company;
- an attempt to obtain a rough estimate of the place of different competitors within a given industry;
The construction of the matrix, where the production capabilities of the company, the attractiveness of the market, and the competitiveness of the production are presented, is the first stage of the portfolio analysis. Similar matrices are built for competing companies, which makes it possible to determine the most likely areas of their activity.
The company’s targeted portfolio strategy is then developed, which includes strategies for selecting markets, areas of specialization, and more.
Portfolio analysis leads to the formation of strategies based on markets and products:
It can be aggressive and offensive or defensive. The defensive nature is chosen by companies that are satisfied with the size of the market share and do not want to increase it due to insufficient resources or other problems.
The effectiveness of the strategy depends on the growth rate and changes in the market. Its implementation requires a lot of costs, and profits are expected in the future.
It is used relatively rarely. It is based on a sharp increase in profit by reducing market share. The profit, in this case, comes from the saved funds for production and maintenance or sale of retail space, bases, enterprises, etc. This strategy is used for products with poor market positions.
Market withdrawal strategy
It sells the entire market share and switches to another type of activity. It is applied when the market share is significantly lower than the critical size or no profit is obtained.
Intensive growth strategy
Used to achieve market leadership in the long run. It is based on: intensive development of innovation activity; development of marketing activities; wide diversification of production; competitive pricing policy, ensuring scientific and technical superiority.
This strategy is suitable for new markets, requires high costs, and involves significant risks.
Strategies can also be classified according to the criteria “market innovation” and “product innovation”, which are the following:
It applies when the organization’s goal is to maintain the status quo on the product market, as this provides sufficient profits. It is aimed mainly at improving governance, not so much at market segmentation. It is typical for organizations in the field of service.
Market maintenance strategy
It allocates significant funds for research of the consumer properties of the product, assimilation of new technologies, and development of new constructions. Many car companies choose such a strategy.
Market development strategy
It is used in companies with different industries when a new product or new market appears. It requires large financial costs and the commitment of significant material and labor resources.
It is applied when large-scale production of a new product intended for a new market begins.
However, solid reserves, reserves, and capacities are needed to realize it. It can only be used by companies with a stable economic situation.
It enters a completely new and unknown market with a product that is not typical for the company that produces it.
This strategy aims to form new needs and create a new market. It is applied when the company has a scientific discovery or a new idea.
- “What is Organizational Strategic Planning”, https://ossalumni.org/what-is-organizational-strategic-planning/
- “Defining the strategic plan of the organization”, https://www.kievpress.info/defining-the-strategic-plan-of-the-organization/
- “The strategic planning process in the organization”, https://newia.info/strategic-planning-process-organization/