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In usual economic times when economies are growing, companies can be successful without too much effort. In difficult times, such as the current global economic downturn, some companies can become very successful by taking advantage of the situation.
Strategy refers to the plan and direction of the company to achieve its advantage through its resources to maximise the best interest of all the stakeholders within the changing environment (White 2004). The aim of any companies' strategy is to achieve its objective in the long term and success by trying to gain and keep up with a competitive advantage over its competition (Hanson et al. 2008), either when the company is in usual economic times or in the difficult economic times. In this essay, the considerations that need to consider in the business strategy were addressed including competitive advantage, the internal and external environment, Porter's five forces model and balance scorecard. Furthermore, these considerations were analysed under the usual economic times and in the difficult economic time with some examples.
Every company needs to maintain its competitive advantage, which refers to the ability of the company to defeat or perform better than its competitions (Hill et al. 2007). Efficiency, quality, innovation and responsiveness to customers, which are important components of the competitive advantage, help the company create more value by lowering costs or differentiating its products from its competitors (Hanson et al. 2008). Either in normal economic times or the economic downturn, the company needs to maintain its competitive advantage by considering the business environment which consists of the internal and external environment, global and competition forces and ability to adapt to the circumstances as needed.
The internal environment consists of the conditions inside the company, including unique resources, capabilities and competence that help the company to identify what the company can do and can affect how the company runs (Viljoen & Dann 2003). The company can promote an advantage over its competitors by internal activities, for example, internally innovations can reconstruct the value chain, and therefore the company can have a clear and difficult to replicate advantage (White 2004).
A company with a distinctive competency can arise from the ownership of the unique resource and the capability to exploit that resource effectively which lead to differentiate its products, achieve lower costs, and create more value and profits than its competitors (Hill et al. 2007). For example, Toyota has distinctive competencies in the development and operation of manufacturing processes, such as just in time inventory systems, have helped Toyota get better efficiency and product quality leading to its competitive advantage in the global motor vehicle industry (Hanson et al. 2008). Other considerations that company needs to consider is the external environment which is the factors outside the company that can influence its ability and performance and help to the company to identify what they might choose to do (Forster & Browne 1996). Economic is one of the key factors of business external environment, which it can influence the company which can affect each company unequally varies from industry to industry and company to company.
Furthermore, analysing Porter's five forces assists the company the insight into a company's competitive position and its survival and profitability. The first aspect of the five forces is competitors which can be weak and not compete aggressively or it can be very intense environment. The company needs to know how strong their competitors are and know the competitors' weaknesses which can then offer opportunities that the company can exploit (Davidson & Griffin 2006). Moreover, the company needs to consider the nature of competition and the intensity of the rivalry in the industry since competition can be based on price, or quality, or features of the product or service, or depends on costs and product differentiation. Competitors can try to win each other by offering the lowest price to customers or by offering the best product quality or service.
For example, competition in the Australian airline business, Qantas and Ansett, has been based on airfare prices (Hanson et al. 2008). They can try to lower the price to attract customers but they cannot easily lower the price of new planes, fuel, or the wages of pilots or flight attendants. As a result, the rivalry between Qantas and Ansett, Ansett could not cope with the lower prices and collapsed (Hanson et al. 2008). It is critical that the company has a thorough understanding of this competitive nature of industry, so the company can gather and analyse this information with other data and decide exactly how the company should compete.
The second force is threat of new entrant that is how easy or difficult for the company to enter the industry (Hanson et al. 2008). One of the characteristic of competitive advantage is the industry's barrier to entry, which refers to the obstacles that make it difficult for companies to get into a business. Common barriers include patent, cost of entry and brand loyalty. The threat of new entrant arises because of the barrier to entry in reduced in the marketplace. Industries with bigger barriers to entry are harder and expensive it is to get into the business, while the lower barriers are cheap for new firms to enter (Hanson et al. 2008). More new entrants will lead to increase the competitions, which leads profit to fall because customers have more choices unless it is expensive and hard for customers to switch from one company to another company or product (switching costs) (Hitt et al. 2007). Therefore, companies are forced to give greater value to customers when they have more choices, for example, airlines increased the switching costs with their award of frequent flyer points to attract the customer to choose it (Viljoen & Dann 2003).
The third force is threat of substitute, which focus on the extent to which alternative products or services can substitute for the existing products or services (Hitt et al. 2007). It means that offering another alternative means of satisfying a customer's need, for instance, Jet Star became a substitute of a bus company. When it costs only $49 for an hour flight from Sydney Melbourne, the bus becomes more expensive, so most people fly rather than take the bus (White 2004). Some companies can make poor decisions about strategy if they fail to see potential substitutes, for example, the bus company can have better buses and drivers than any other bus company in bus industry, but if flying becomes a substitute for taking the bus, the bus company may be in difficult status (Hanson et al. 2008).
The fourth force is the bargaining power of buyers which relates to the customer's price sensitivity and the negotiating power. If the product is very similar, customers will based their decision on price, but if there are few large buyers and these buyers are gathered, they have more power to demand lower prices or have significant leverage to negotiate a better price (Mollan 2010). Factors that affect the buyer power are size of buyer, number of buyers and purchase quantity.
The fifth force is the bargaining power of suppliers. When many suppliers manufacture g a commoditized product, the company will make its purchase decision based on price, which tends to lower costs (Hanson et al. 2008). In contrast, if one supplier produces things the company must have, the company will have little power to negotiate a better price (Viljoen & Dann 2003).
In addition, the balanced scorecard is a strategic planning that is used in to align business activities to the objective and strategy of the organization, improve internal and external activities, and monitor company performance against its aim. The balanced scorecard consists of four critical perspectives. Firstly, the financial perspective measures how shareholders perceive the company. Secondly, the customer perspective measures how customers perceive the company. Thirdly, the internal business perspective measures how well the company is doing in internal business operations and processes. Lastly, the innovation and learning perspective measures how well the company is doing at innovating, improving and creating value.
It can be said that it is critical to analyse these five forces as it gives a good explanation for the survival and profitability of an industry, and the firms within it. No understanding in Porter's five forces as well as changes in business environment, for example, changes in customer demand, the more of new entrants can lead to elimination of company competitive advantage. Each of these factors can create opportunities for some companies, but have a negative outcome for others. For example, weak economies in Asia made Australian producer harder to sell their raw materials, such as iron and wool, in Asia, in contrary, the price of imported components used in Australian industrial products decreased, making locally assembled goods more competitive (Hanson et al. 2008).
In the usual economic times during the 1980s, Cars from Japan had a significant advantage in product quality, but over time, U.S. and European manufacturers improved their car quality, and the difference between qualities is smaller, therefore, quality has no longer be an effective differentiator (Hanson et al. 2008). It can be said that the Japanese cars need quality to be able to compete, but also producers must put more effort to find new sources of advantage to maintain its competitive advantage for survival. No company can survive or successful if the effort is not enough.
Some companies failed during good economic times, for example, General Motors, which held over 60 per cent of the US automobile market, failed because they failed to recognise their risks and they too much enjoyed their success in the early year that made them become more confident and arrogant. The company are not willing to change easily and quickly as it is locked in their usual or conservative way of thinking and become very rigid about their belief system. The company became highly bureaucratised in their existing policies, processes and culture, accumulated costs during their growth phase, internal conflict between functional departments which created a negative effect on customers and employees. Furthermore, competition intensity and a threat of substitute may become a problem for some companies even in good economic times, such as Microsoft is being challenged and the investors of Microsoft have been decreased since the rise of Google and Linux. In the photography business, Kodak and Fuji which are the traditional film companies faced a new competitor from the computing and consumer electronics industries. Recently, the outsourcing of several business processes and back office functions to locations, for instance, India brings a new type of competitions into the industries. Moreover, the inability to change, government regulation and its leadership orientation can have an impact why the company fail because it can't adapt as needed, for example, Pan Am and Eastern Airline failed after rapid deregulation in the late seventies because it could not change or adapt fast enough to resist its competitions.
Customers are changing and evolving which some shifts in customer preferences and tastes may be triggered by technology, for example, the explosion of the internet and wireless has affected how the customers search and buy the products. Obviously, if the company fails to keep up with the changes, it will gradually lose customers. Each of the changes represents a potential opportunity as well as a threat to the company. Companies that can survive in the long term are those that are able to dynamically adapt to these changing situations.
However, currently, the business landscape is changing to become a current business landscape which includes, for example, economic downturn and unstable (such as in Japan, Asia, the United States), wars, fear of disease (such as Bird flu), rapid technological change, exchange rate unstable, changes in the fund raising environment, international competition intensifies, age of disbelief, terrorism and natural disaster (tsunami or earthquake in Haiti) (Tearfund 2010; Davidson & Griffin 2006). These current business environments represent a significant threat to global business. For example, the inflation can have an impact on how quickly costs rise and the high unemployment can affect how easy or difficult it is to find the type of labour the company need (Davidson & Griffin 2006).
The creation of trade blocs can have a major impact on companies, in 2002, the Euro was introduced as a floating currency for many western European nations creating a unified trade bloc that would function as a single market. A single market in Europe is advantageous for Australian wine manufacturers (Hanson et al. 2008). While they have been successful in selling into non-wine-producing countries in Europe, particularly the United Kingdom, they have been largely blocked from the major wine-consuming (and wind-producing countries) such as Italy, Spain and particularly France. The single market opens up opportunities for increased exports to these countries (Hanson et al. 2008). To survive and success in the current business environment, companies are required and depends on the extent to which the organisations is able to learn, adapt and change.
In the current business landscape, to help the company to analyse its environment is to apply the five forces model that was developed by Michael Porter (Hitt et al. 2007). This model consists of five environment forces (Porter's five forces) that can affect the company performance in the same industry (Hitt et al. 2007). This model can explain why some companies can survive or more successful than other companies in the same industry. Changes in the business environment can give some companies the opportunity to gain competitive advantage over its competitors since some companies understand the firm environment, beware of the changes and can respond to the change quickly and effectively. As each firm is different in terms of resources, capabilities and structure, any changes will have a different effect on the performance of the firm. It can be said that successful companies are those that are flexible enough to respond quickly and effectively to these changes. For instance, interest rates were low in the early 2000s in Australia and were a major factor in the housing boom of 2004 which the home builders and loan provides rushed for business (Hanson et al. 2008).
In the difficult economic, the some companies which is strong company may get stronger as these companies see this economic downturn times as their challenges and opportunities to prove their ability and position. During the economic downturn in 2001, according to the research by Bain Company, 24 percent firms out of the 2500 companies have been running their businesses in great position and getting even stronger than in the usual economic times (Thompson 2010). For instance, Southwest Airline is able to grow with clean balance sheet and clear cost advantage during the last recession as opposed to its competitors (Thompson 2010). Southwest reduced its fare to gain the market share, putting more advertising on this lower price advantage and importantly built a good relationship with its labour by avoiding layoffs as opposed to its competitors which lay off employees, cut jobs and capabilities (Thompson 2010). The distinctive competency comes from the unique skill to manage resources better than competitors do, (White 2004). As a result of analysing the internal (resources; employees) and external environment during economic downturn combining with examining what the competitors were doing, Southwest grew 51% per cent in the six year ended 2007 and it was making a profit every year since it was established and took the advantage from the recession by proposing a strategy to align with that situation or downturn.
Another example is Audi, which is the luxury car manufacturer. Audi examined its abilities and opportunities and chose to gain market share while other competitors are pulling back during the tough economic times. Audi increased its marketing investment 15% in 2009, gave more attention to the changing environment's demands and kept focusing with its long term objectives. By analysing the situation, Audi made an improvement in car production to support customers' demands, making car better with more customer-focused than before, more careful about the costs and invest the right thing that lead to some shift in market share in tough economic times than there is in a good economic times.
To conclude, the strategy is concerned with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting resources and creating new opportunities. Success goes to the business that responds to the new environment and develops the required competitive advantage, enhancing its position while defeating competitors. A firm that is late in responding to these changes has limited strategic options. For the business to maintain its success, it must develop a new basis for advantage, based on detailed understanding of customer needs, competition, and its own competences.