Lesson 1, Topic 1
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1.4 Alternatives For Maintaining Competitive Advantage Copy

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Nik Shazana November 1, 2022

A company’s business strategy guides the activities in which the firm engages. It also guides the firm in choosing how and where management decides to engage in those activities. Many strategy variations exist, but cost, differentiation and niche focus are the three main business strategy types in common use. When evaluating a company’s business strategy, it’s deemed successful when the analysis shows that the strategy generates a sustainable, above-average profit as compared to the firm’s competitors over time.

Business Strategy

A business strategy is a set of goals and policies for how the company conducts its business. Coming to an agreement about the statement of a company’s strategic plan while challenging in many ways it is vital to the company’s future success. A valid business strategy is a process and means to bring to completion the company’s growth, profit and whatever other goals management may target. While choosing the wrong strategy could still bring some benefits to a company, it won’t bring as many benefits as opting for the right strategy, and it could also ultimately spell disaster for the firm.

Evaluating Strategic Options

It’s important to put a good amount of time and thought into implementing and evaluating strategic options. When first starting a company, a business strategy may not seem like a critical component of the firm’s success formula. However, valid business strategies can bring extraordinary results to companies that otherwise have a very average level of competence as compared to competitors or peers. Even if the company has talented, inspired leadership*,* if it has a poor or _inappropriate strategy, the management team will need to work at maximum capacity,_ just to keep the company from losing ground, which will remove any chance of the company growing. Implementing a great business strategy can also cause an average firm to outperform companies that have superior resources or other potential advantages.

Although strategy evaluation and selection is critical to a company’s future success, it’s not the only factor. A firm must also have competent management and leadership, and management must have clarity on the company’s goals and policies. A corporation’s goals describe what the company as a whole wants to achieve and become. Policies represent the means to achieve goals. Those pieces are necessary for a company to achieve its full picture of success. It’s important that companies focus not on what they want to have, but on what they want to be. The corporation’s goals must consider not only products and money but also meeting the needs of the various groups that keep the firm alive, which includes management, employees, customers and shareholders. When a company defines its strategy through policies, this will involve a discussion of how the company will the meet the goals going forward. The policies describe what company management and employees should and should not do in order to help the corporation achieve its goals.

These policies cannot just give lip service to the goals, they need to be an explicit statement of the company’s strategy and provide direction to the company’s staff. New policies need to be specific. For example, “Will provide our shareholders with a fair return” is too general to act upon, because the company has not defined what constitutes fair return and how the company intends to achieve it. When companies decide upon a particular business strategy, there are few risks involved. Companies that have no clarity nor any real understanding of goals versus policies risk the goals becoming platitudes that are recorded as a supposed strategy. Instead of the goals and policies that become words that don’t do anything to achieve consensus on the company, actions clarify the way forward. Some companies use the goal of becoming bigger without a strategy that considers how current management will handle a larger operation, or if bigger makes real economic sense for the company.

Measurement Guidelines for Strategic Effectiveness

A company might find great success without committing its strategy to paper, but for managers and employees to understand, implement and measure a strategy, it must be clearly documented. Management must also understand the strategy well enough to effectively coordinate and delegate tasks. Without this important step, there will not be a basis upon which to evaluate the strategy for effectiveness. Additionally, if a company fails to clearly document its business strategy, regardless of whether it is successful, it will not have a working strategy to easily replicate in new ventures or acquired businesses.

Business strategy evaluation methods start with assessing the internal consistency of goals and policies for different parts of a company, which must all fit together to form one integrated plan. Any differences in strategy, such as a family-owned company that wants rapid growth but also wants to keep family control or ownership, will cause issues because of the lack of consistency with the internal strategies.

Measuring Based on External Consistency

A business strategy must also be measured based on its external consistency. Every company has certain prices, pricing policies, advertising themes and other actions that show how it relates to its current and potential customers. A company’s strategy must support the outside environment, including its peers, competition and the economy now and as it evolves in the future.

Having Enough of the Right Resources

Having enough of the right resources is critical to a successful business strategy. In assessing and measuring the effectiveness of a strategy, it’s important to take into account the confidence of the management team, the availability of money to execute the strategy, and the physical facilities available to the company.

Finding a Good Balance

Measuring effectiveness includes assessing whether a company has found a good balance between its desired goals and the actual resources it has available to achieve those goals. A valid strategy will have a process to identify and project the estimated number of resources the company needs; the rate at which they’ll be used; and the chances that the resources will be available when the company needs them.

Failing to Properly Assess Needs

A common mistake when measuring the effectiveness of a strategy is a company’s failure to properly assess its needs, and either underestimating or having too much optimism about what’s actually needed to accomplish the strategy. This is difficult for both large and small businesses, and many small businesses fail because they underestimate and have inadequate resources to either get through the start-up period or handle an unforeseen downturn in business.

Measuring the Risk of a Chosen Strategy

It’s important to also measure the risk of a chosen strategy. For most companies, the strategy they choose and the available resources they have dictate the riskiness of their operational strategy. Even the best strategy fails if the company runs out of money, for example. However, a company may choose to take such a risk if the possibility of a huge payoff exists. Each company must choose the level of risk it can handle. This can be quantified mathematically but also assessed on a qualitative basis. The probability of the necessary resources being available and the amount of time the company needs these resources is compared with the amount of resources dedicated to a single venture. A greater need equals a greater risk.

Allow for the Appropriate Time Horizon

A business strategy will not be successful unless the company allows for the appropriate time horizon. A viable strategy includes goals, and is clear about when the goals will be achieved. Qualitative benchmarks can help, however, organizations change slowly and need time to work through any modifications to a strategy. As companies get larger, they must also push out their time horizon to implement changes to the strategy, because they are no longer as nimble as they were when they were a smaller business. The benefit of a longer time horizon is that the company has a greater range of ideas and tactics to consider and employ. Companies that are pressed for time are limited in their options and if troubled, they may only have enough time for a merger or acquisition to save themselves.

Business Strategy Methods

When a company chooses the type of activities to engage in, along with how and where to do them, it is strategizing. If successful, The Firm will generate an above-average profit. There are three basic types of strategies that companies use to achieve profits on an ongoing basis. While some firms choose to pursue multiple strategies, this can become problematic. It’s best for a company to master one strategy, such as the cost strategy, before adding another such as product differentiation.

Cost Leadership Strategy

Companies choosing this strategy become the low-cost competitor among their peers and their industry. Typically, only one company per industry can successfully hold this position. The strategy is usually achieved through either economies of scale, some kind of technology advantage, or a company’s unique access to certain types of raw materials. In each scenario, a company can charge product prices that are level with the rest of the industry, while keeping their unit costs lower than the competition. On the downside, if a company is reducing its costs at the expense of product quality, this can start a downward spiral that the company might not be able to recover from. Additionally, if the firm’s competitors do the same, an entire industry could start a downward spiral into oblivion.

The Differentiation Strategy

Some firms choose a strategy to offer products and services that are different from the competition in the sense that they offer exceptional value as compared to other companies in the same industry. Firms that use the differentiation strategy may incur higher product costs, and the company must be able to command higher prices for its goods in order to remain profitable. As part of the strategy, the company may need to reduce its spending in other, less critical parts of the business. Over time, many of the firm’s competitors may also choose to pursue this strategy.

Niche Focus Strategy

In this strategy, a firm will hone in on a specific segment of the industry, and offer products that address this specific segment. Often, the company will choose to address an area of weakness for its competitors. The company becomes an expert and a certain product or market niche, and develops a following consisting of a narrow set of much-targeted customers.

Self-Check Activity

  1. Point out the alternatives for maintaining competitive advantage.