Strategy is fundamental in an organization’s overall performance. The strategy selected depends upon numerous factors. The environment has a direct influence on the relationship between strategy and performance. The combination of several factors contributes to the strategies chosen and influence the performance of an organization. The current dynamic and competitive business environment influences companies to survive, grow and be profitable as an essential goal for all industries.
Organizations are challenged by identifying the benefits and limitations of Porter’s Five Forces and Kaplan’s and Norton’s Balanced Scorecard. These powerful strategic management tools can be linked to interact with each other. Porter’s work can facilitate managers formulate their strategy making decisions on the basis of organizational external environment. Kaplan’s and Norton’s work makes sure the strategy formulated incorporates specific objectives to ensure and monitor the strategy is executed by managers within well structured measures.
Michael Porter’s five forces are business theories that can clarify important issues a business faces. The strategy is determined by a unique combination of activities that deliver a different value proposition than competitors or the same but better. The intent of Michael Porter is to help discover why conditions are the way they are in a deep strategic analysis. The five forces inform and promote the strategic review process, environmental investigation and positional analysis.
Porter’s model provides a general view of the firm, its competitors, and the firm’s environment (Laudon, K. , & Laudon, J. 2012 pp. 95). It reveals the source of competition in an industry and the external impact including the opportunities and threats an organization faces to gain competitive advantage. Porter’s five forces are of great importance to promote strategic options to improve performance in the industry. It also provides a good explanation for the profitability of an industry and it becomes a useful instrument to evaluate if a company is able or unable to make profit.
Porters’ idea is that companies must respond strategically to competition in order to sustain long-term profitability. The five forces framework can be used to gain insight into the forces at the work in the business environment of a strategic business unit which need particular attention in the development of strategy. With a clear understanding of where the power lies, it will enable a company to take a fair advantage of its strengths, improve its weaknesses, and avoid taking wrong steps. There are some limitations to the Porter model.
The five forces determine a company profitability, but at the heart of the industry are rivals and their strategies (http://www. coursework4you. co. uk). Additional limitations on the model in today’s market environment as it supposes static market structures. The model was originally based on the eighties with strong competition and stable market structures, but it is not able to assume new business models and adaptability of the industries. Porter’s model is not correct because if every company adopts these strategies, none would be able to have a competitive advantage.
Some do not fully agree with Porter’s theory emphasizing that it is attractive to management because it gives ‘some illusion of control, legitimacy and security in the face uncertainty. The strength of may change trough time due to factors organizations cannot control. In such circumstances, it is crucial managers recognize opportunities and threats when they arise and formulate the appropriate strategy to modify the strength of one or more of the five forces (Hill and Jones, 1995).
It does not mean that Porter’s theories are invalid, but when the model is adopted there must be an understanding of its limitations to use it as part of the management techniques, tools and theories. Kaplan’s and Norton’s Balanced Scorecard however, is an organizational framework for implementing strategies at all company levels combining strategy objectives and measures. Integrating key performance indicators with financial measures the scorecard can provide an enterprise view of an organization’s overall performance.
The balanced scorecard purpose is to provide a measuring tape by which someone can determine whether the goals have been met or exceeded. Balanced Scorecard allows companies to bridge the gap between mission statement and how the day to day activities support the company’s mission and objectives. The balanced scorecard can also provide a visual mean of demonstrating how different goals are related, it is a beneficial tool to assist management to better communicate the strategy, to motivate and prioritize the team to common and long term goals. By using the alanced Scorecard approach, the immediate future is not the only thing being evaluated, it allows stakeholders determine the health of short, medium and long term objectives at glance.
The balanced scorecard methodology helps leaders move from reactive to proactive mode. A good scorecard contains not only outputs or result metrics, but also metrics that provide insight about ongoing performance and drivers that influence results. Maintaining awareness of performance levels and arisen problems, managers can take action to mitigate the effects. (http://www. ehow. com/about_5431829_advantages-balanced-scorecard. tml) One of the problems of the balanced scorecard is that managers spend a great amount of energy and time gathering and analyzing the respective data rather than making decisions.
The cost of the procedures may outweigh improvements in the organizational performance. The balance scorecard provides ideas to improve the performance of the company and it acts as a fact sheet, but it requires that the facts are analyzed in order to determine an evaluation and strategy. The scorecard will not solve all the company’s problems but it must be combined with a larger overall strategy to achieve its potential benefits.
Implementing the balanced scorecard can bring upon the company high initial costs mixed with the time spent on developing the employees. The question on whether the employees in organizations are open and receivable to new measures when numerous measures that already exist have proven to be another problem. Some other potential problems of the scorecard can be taken into consideration, the lack of a well defined strategy: The first defined problem that many companies may encounter is that top management cannot articulate a clear and well defined strategy.
The criticisms do not necessarily undermine the usefulness of the balanced scorecard in presenting a more comprehensive picture of organizational performance, but they do raise doubts concerning claims that a balanced scorecard can be constructed which will outline an effect chain between driver and outcome measures and the financial objectives of a company (http://apmstuff. blogspot. com/2010/06/limitations-of-balanced-scorecard. html). In conclusion, strategic management involves formulation and implementation of strategies. anagement has to choose the most appropriate strategy to remain competitive in the agitated environment.
The strategy links the organization and the environment but the strategy choice is influenced by the business environment. The strategy selected will have an effect on the performance of an organization. The performance may vary from one strategy to another and also depending on the measure of performance used. There is a need to research the link of a firm level factor and performance. The factors include resources, structure, organization culture, attributes of chief executive officer and board characteristics.
Performance measures used have mainly been quantitative for example return on assets. There will be need to use qualitative performance measures and determine performance variations under different strategies. With a successful strategic management process a company should be able to build a competitive advantage over other competitors. Strategic management identifies the competitive advantages that can be generated through strengths of the organization in order to take the necessary steps to effectively obtain it.
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Topic: Strategy: A Fundamental Element in an Organization’s Performance
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