Rational Planning Model – Part III: Strategic Option Generation (Part 01)

There are several options when it comes to business strategy. Different strategists have come up with their own versions and methods of developing strategies that best suit businesses in different business conditions. One of the most prominent and highly regarded such strategy is the ‘Generic Strategy’ model put forward by famous strategist Michael Porter.

01) Generic Strategy – Michael Porter

In this model, Porter has put forward very basic two strategies that businesses could adopt. Although the strategy seems simple and harmless, almost every business needs to decide on one of the strategies put forward in this model. The two strategies are;

1. Cost Leadership
2. Differentiation

Cost Leadership

This is the strategy where businesses try to be the lowest cost/price option in the market thus attracting more customers who are more focused on cost rather than uniqueness of a product.

A cost leader is the business that provides products at the lowest in the market or at very competitive low prices; hence this gives them a competitive advantage over other businesses that have higher prices. Customers are rational, meaning they will always try to maximize personal satisfaction and in this case personal satisfaction means best product at the lowest price possible. So as rationale customers, the market will prefer the low cost option most of the time (because this option will not work with products where the price is associated with prestige and a certain higher standard of living).

Businesses that are into selling essential commodities can adopt this strategy better than any other industry.

A cost leader will always have the generic product (basic product), no improvements, nothing additional, so as to keep the cost and thus the price to a minimum level. A cost leader will have only a smaller margin (profit) over a product, however it is compensated with the higher volume of products sold.

Differentiation

This is a strategy where the business focuses on providing a unique product rather than the same product provided by the competitors.

This will set aside the company from the competition and provide a competitive advantage.

These businesses can either, innovate a new product, improve the existing product or provide additional benefits/features with an existing product, thus differentiating them from the rest. This will require further spending and hence the price will be naturally higher, but customers who like something new, innovative and fresh will always go for these products rather than the same old product.

Due to the unique nature of the product, differentiators will be able to charge a higher price and earn higher margins, but the sales volumes will be relatively low, since not all customers are lavish spenders.

Eg: Apple products deliver a unique experience than any products of its nature. Hence the price is very high, yet there is a huge demand for the products.

Business Strategy

We all have different ideas as to what strategy is. Some may think it is a tactic or other may think it is a plan. Well both of them are not far off, since an accepted definition for Strategy says ‘a course of action/plan that is developed or designed to achieve a set of objectives’. In simple words it is a set of rules and guidelines that will help us achieve some target we have set.

A Business strategy is pretty much the same, whatever the actions taken by a business to achieve its set objectives. A strong strategy is important for any business to distinguish themselves from the competition and face it. Also it is important to be aware of the competition’s strategy when preparing our strategy.

Business Strategy is mainly evaluated through the Rational Planning Model which is demonstrated as below.

Every bit of planning and organizing and strategizing in an organization should start with its mission and objective statements, because every action taken by the organization should eventually lead to achieving business’s mission and objectives. A corporate appraisal is carried out to understand the current position of the business both internally and externally. A preferred analysis method would be SWOT analysis. Then it is essential to generate strategic options which are in line with our business position and mission and objectives. In the next step those strategic options should be evaluated and the best option should be selected. Such strategy should then be implemented and reviewed and controlled as and when required.

A more detailed look into the each of the steps of the Rational Planning Model will be conducted in the articles to come. Keep in touch and comment for any questions and ideas.