Strategic Decisions Making Tools in Business Management

Subject: Management
Pages: 7
Words: 2156
Reading time:
8 min
Study level: PhD

Introduction

Decision-making strategy is a fundamental strategy in Strategic management. It entails exploration of options, weighing alternatives, and settling for the most appropriate measures that will sustain the survival of a business entity. In a nutshell, strategic decision-making is used to determine the business direction and the path among alternatives to be taken to ensure that an entity meets its objectives and remains relevant in business (De Wit and Meyer, 2010a).

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Described in this essay are the fundamentals of two critical strategic decisions making tools and the exploration of their applicability in business management. The two tools are porter’s five-factor analysis and SWOT analysis. Porter’s five-factor analysis assesses what attracts market competition in a given market while SWOT analysis assesses the strengths of a business entity and its survival in the face of threats from competitors (Porter, 1985a).

The essay is also shown how the strategic decision-making concept is applied in the banking industry and its possible relevance in a new business environment. I have a touch of experience on the viability of the aforementioned tools in a competitive business environment. Based on my experience as a bank accountant at Barclays bank and the knowledge of the strategic management module, I consider the above tools as the basic essentials without which erratic formulation and implementation of business expansion plans are imminent which may lead to a subsequent failure. They are extensively applied in the implementation of critical success factors of Barclays bank, specifically, execution of strategically planned business expansion. Below is the description of their literature and applications in effective business management.

Porter’s five-factor analysis

According to porter’s five-factor postulate, the attractiveness of the market is the fundamental force in any business competition. Based on this postulate, the survival of an organization in business will depend on the following five factors: The possibility of new entrants in the market, buyers’ bargaining power, suppliers’ bargaining power, business competition degree, and the threat of substitute products (porter 1985b).

The possibility of new entrants in the market: This factor analyses the penetrability of a given market. In an ideal market situation, a market structure that is difficult for the entrance of new players is more profitable to existing firms than the one whose entrance is easy. The following forces will keep the possibility of entrance of new players in a market low: High initial entrance costs, the existence of major advantages for existing market players, high loyalty level in existing brands, the possibility of aggressive reaction to new entrants and suppliers’ control by existing players. I evidenced the relevance of the above forces while working at Barclays bank in Chicago where Barclays and standard chartered bank are the most dominant market players in banking. In terms of network presence, Barclay’s bank is popular than a standard chartered bank. Its extensive network had worn it the majority of bankers in Chicago. Its popularity among the population had given it a competitive advantage over standard chartered and other small upcoming banks. The awareness of the competitive advantage of Barclays bank and the implementation of effective strategies lowered the penetrability of the market to give it a majority market control.

The second factor is the buyers’ bargaining power which is the extent to which buyers control the market. According to this postulate, the higher the buyers’ bargaining power, the lower are the price margins of the products on the market which implies low-profit margins for the firms. A high buyers’ bargaining power could arise due to the following reasons: The existence of a few big corporate customers and if the customers have the option of switching to other service providers in the industry who are offering similar products at lower prices. Buyers’ bargaining power is also supported by their ability to buy off the business firms in the market and control them. Higher buyers’ bargaining power is a threat to the survival of existing business firms in a competitive market structure because it may push some business entities which are less established to make irrational and unpopular decisions which may lead to their downfall. The effects of this factor are evident in the banking industry where the existence of a few corporate customers with huge sums of money in their bank accounts have negotiating powers to change the banks’ policies and procedures. This was once a case with a Barclays bank branch in Chicago where prestigious customers, corporate account holders with huge sums of money in their accounts, used their bargaining powers to change the banking policy. Following customers’ demands, the bank management extended banking hours on Saturday from noon to 2:30 pm. The effects of this policy change resulted in an increased cost of management as the security guards and bank employees demanded extra pay for extra duty dispensation. The bank was forced to comply with the customers’ demands because the loss of one such customer could have been disastrous to it (Grant 2007).

The third factor is suppliers’ bargaining power: When the bargaining power of suppliers is high in a given market structure, the profitability of existing players in that market is low because suppliers wield negotiating powers to determine the terms of business conduction. Suppliers’ bargaining power is supported by few suppliers in the market and the possibility of such suppliers to buy off the existing firms to have complete control of prices and other business terms. This is prevalent in a market structure where suppliers tend to form mergers with common short-term objectives. Merging reduces rivalry among suppliers and gives them higher bargaining power. A practical illustration of the effects of the suppliers’ bargaining power is the G4S case at Barclays bank.G4S is a security firm contracted by Barclays and other banks to offer security to cash on transit. It is the most dominant service provider to most banks in Chicago. There was a time when G4S doubled the rates for cash transport to the central bank based on the claims of increased security risks due to an increase in robbery. Banks were compelled to comply with the new rates of G4S services because of its dominance in the market.

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The fourth factor is business competition degree. Stiff competition among existing market players results in low pricing of commodities and a subsequent drop in profits. Such rivalry may increase due to the existence of a large number of firms of similar sizes in competition for similar customers and little brand loyalty which means that customers are more likely to switch with ease between the service providers (Pascale, 1984).

This is a common case in supermarkets where all existing entities in the market structure offer similar products and services at similar prices. The large consumer base, in this case, normally switches between supermarkets because of the lack of significant benefits of sticking to one supermarket. Another illustration is seen in the banking business where competition for market share results in a reduction of bank transaction charges in a quest to attract new customers and retain existing ones. There exists stiff competition for the market share between Barclays and Standard chartered banks in Chicago.

Comparatively, the standard chartered bank has higher banking rates than Barclays, a fact which has made middle and lower-income earners have a preference for Barclays bank. Stiff competition with Barclays at some stage made standard chartered banks consider lowering their rates to retain its customers who were leaving for Barclays bank. The move to reduce banking rates by standard chartered banks reduced its profit margins and increased competition pressure to Barclays which had to reduce its rates further to retain its competitive edge against its rival.

Lastly, is the threat of substitute products which measures the ease with which customers switch to other products which are cheap with similar benefits. This is again prevalent in the banking industry where retail customers may switch between banks in search of low banking rates (Charles 1985).

The above Porters’ postulates are aptly employed by the management of Barclays bank in making business decisions. The factors have helped extensively to expose the existing business threats and possible opportunities for business expansion. For instance, it exposes the bank and its customers’ bargaining powers which are essential in planning for an adjustment without incurring higher costs which may reduce its profit. As a manager in a new business prospecting firm, most importantly, I consider it very essential to analyze the market structure to establish its forces such as the suppliers, customers, politics, geography, and culture of the people so that decisions made are in harmony with the environment. I will then integrate porter’s five factors analysis and the knowledge of the market environment in making decisions pertaining to business expansion to ensure that the business moves adopted by the organization result in high-profit margins for the firm at minimum resources (Mintzerg, 1975).

SWOT analysis

SWOT analysis is performed to find out how a business entity will fare in the market against internal and external forces. De Wit and Meyer (2010a) explain that this will require taking some precautionary measures or even at some point changing the entire strategy to stay aloft in the market.

The analysis involves the assessment of opportunities that may arise from the strength of an organization, threats from competitors to the company’s strength, opportunities that arise from the firms’ weakness, and finally threats from competitors that arise from the weakness of a given firm (Gupta and Donald, 2005).

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In my view, effective management demands a manager, to assess the opportunities against the strength of his firm and exploit them appropriately. For example, if the strength of the firm is high-quality products that have worn the loyalty of customers, the manager should ensure sustained quality at all times and venture into new market environments. An effective manager should also be able to see opportunities in the weakness of his firm. For instance, if the weakness of the firm is low presence in a given market environment, the manager should move quickly to expand the network presence of his firm to enhance business growth and expansion while the firm enjoys the customers’ preference. On the other hand, a strategic manager should assess the threats of his firm from competitors due to its strength and employ measures to ensure that his enterprise is not sent off from the market by its competitors. He should also be able to analyze the threats against the weakness of his organization and make necessary adjustments to ensure that the organization is not swamped in the threat of competitors (Johnson, Whittington and Scholes 2010).

In summary, the successful implementation of SWOT analysis is an embodiment of strengths, weaknesses, opportunities, and threats of an organization in a given organizational environment (De Wit and Meyer, 2010b).

Barclays bank uses SWOT analysis to explore the strategies that are relevant in sustaining its business growth. The managers carry out an assessment of the bank’s strengths and weaknesses against the market forces and use the findings in making business decisions that affect the operation of the bank. For instance, among the bank’s strengths are its extensive network presence and flexibility of loan terms to working-class people in the United States of America. The bank capitalizes on these strengths to market itself among the working population of America and expand its growth. Among the weaknesses of the bank that I noted while working there was the long duration of time taken to process payments and salaries for salaried people compared to some of its competitors. As a prospecting manager in a new business environment, I will consider the analysis of the market environment to establish its threats and my firm’s strengths. With the knowledge of my entity’s strength, I will ensure the formulation of strategic decisions that will capitalize on the advantage of the market to expand the new business. I will also strengthen the weakness of the firm against the existing market competitors. For instance, the network presence of a new business entity is obviously low, owing to this; I will assess the response of the market to my entity’s products and if positive, I will make a quick move to establish a high network presence while the firm enjoys the preference of the market (Bowman, 1998).

The knowledge of weaknesses and strengths will help in taking appropriate measures to mitigate the loss of business to competitors and enhance business expansion (Pascale, 1984).

Conclusion

In conclusion, the two tools of strategic decision-making described above are regarded, in my view, as the basics of effective business management. The successful implementation of the two approaches may vary slightly from one environment to another depending on the existing market structure (Gupta and Donald 2005).

The success of Barclays bank in Chicago against its competitors borrows extensively from effective decision-making approaches above. In summary, the success of a new business entity entails the effective application of the afore-described strategies which should be a continuous process since the organization environments are dynamic and change is inevitable.

Reference List

  1. Bowman, C., 1998. Strategy in Practice. Englewood Cliffs, N.J.: Prentice Hall.
  2. Charles, R.S., 1984. Strategic Management: Cognitive simplification processes in strategic decision-making. New York: John Willey & Sons.
  3. De Wit, B. and Meyer, R., 2010a. Strategy synthesis. 3rd ed. London: South-Western Cengage Learning.
  4. De Wit, B. and Meyer, R., 2010b. Strategy Process, Content, Context: An International Perspective.4th ed. London: South-Western Cengage Learning.
  5. Grant, R.M., 2007. Contemporary Strategy Analysis. 6th ed. Oxford: Blackwell.
  6. Gupta, S.L. and Donald, R., 2005. Managing Customers as Investments: The Strategic Value of Customers. New Jersey: Pearson Education/Wharton School Publishing
  7. Johnson, G., Whittington, R. and Scholes, K., 2010. Exploring Strategy: Text and Cases. 9th ed. Englewood Cliffs, N.J.: Prentice Hall.
  8. Mintzerg, H., 1975. The managers job; folklore and facts. Harvard Business Review, 53(4), p.49.
  9. Pascale, R.T., 1984. Perspectives on strategy: the real story behind Honda’s success. California Management Review, 26(3), pp. 47-72.
  10. Porter, M.E., 1985a. Competitive Strategy. New York: The Free Press.
  11. Porter, M.E., 1985b. Competitive AdvantageCreating and Substaining Superior Performance. New York: The Free Press.