The Need for Strategy in business

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In the business, the term strategy signifies an integrated pattern of decisions made and subsequent actions taken to reach specified goals. Furthermore strategies are usually described at three levels- corporate, business and functional. Strategy is about survival, growth and profits in a competitive environment. It is neither a manual nor a rulebook. Strategy is for effective managing of activities towards company’s vision. Its basic purpose is to win in the competition, through guiding management decisions, and act as an engine for communication, corporation and build commitment within the company.

Changes in the business environment have been happening since a long time in micro and macro steps, but the changes have gathered speed and keeping pace with the challenge. As we enter a turbulent market demand is becoming fragmented, product life cycle is becoming uncertain, mass customization is needed for customer delight, benchmarking is becoming higher and higher and the margin for making mistakes are becoming lesser and lesser. In such challenging uncertain, unpredictable future, short-term and long-term decisions will have to be taken carefully.

The only way to deal with such a demanding environment is to develop internally an ability to plan, organize and use smartly the available resources essential to cope with change. For that a new strategy is needed, which may not always be real-time but at least takes timely decision. The strategy should reflect how the competitiveness parameters like speed, flexibility, cost, quality, etc will be achieved simultaneously and concurrently to meet the changes.

Competitive strategy is a statement of intent, set of plans and policies by which a company intends to gain advantage over its competitors. It also states how the manager intends to satisfy the needs of customers in terms of products and services.

Porter's Generic Strategies

Target Scope

Advantage

Low Cost

Product Uniqueness

Broad

(Industry Wide)

Cost Leadership

Strategy

Differentiation

Strategy

Narrow

(Market Segment)

Focus

Strategy

(low cost)

Focus

Strategy

(differentiation)

There are broadly three generic competitive strategies:

Low cost leadership- is the ability of a firm to design, produce and market a comparable product at a lower cost than the competitors. It involves being the leader in terms of cost in your industry or market. Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership.

Firms that succeed in cost leadership often have the following internal strengths:

Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.

Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.

High level of expertise in manufacturing process engineering.

Efficient distribution channels.

Product differentiation- is the ability to provide a unique and superior value to the buyer in terms of product quality, special features or after sales service. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily.

Firms that succeed in a differentiation strategy often have the following internal strengths:

Access to leading scientific research.

Highly skilled and creative product development team.

Strong sales team with the ability to successfully communicate the perceived strengths of the product.

Corporate reputation for quality and innovation.

Focused approached- is where the company studies activities of the customer group, becomes familiar with the main problems and provides specific solutions. Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy. By separating the strategies into different units having different policies and even different cultures, a corporation is less likely to become "stuck in the middle."

Generally, a company uses generic strategy to gain competitive advantage in the market, but soon loses edge since competitors emulate it. Hence, the company must understand what are the key success factor for survival and growth in the industry and to what extent it is good at them; how its competitors deal with those factors, and then benchmarking itself in at least three-four key areas by identifying, upgrading and findings innovative ways, keeping in view the attributes that are important to end-customers.

The danger of being 'stuck in the middle.'

Make sure that you select one generic strategy because generic strategies are not necessarily compatible with one another. It is argued that if you select one or more approaches, and then fail to achieve them, that your organization gets stuck in the middle without a competitive advantage.

Porter specifically warns against trying to "hedge your bets" by following more than one strategy. One of the most important reasons why this is wise advice is that the things you need to do to make each type of strategy work appeal to different types of people. Cost Leadership requires a very detailed internal focus on processes. Differentiation, on the other hand, demands an outward-facing, highly creative approach.

So, when you come to choose which of the three generic strategies is for you, it's vital that you take your organization's competencies and strengths into account.

Use the following steps to help you choose.

Step 1: For each generic strategy, carry out a SWOT analysis of your strengths and weaknesses, and the opportunities and threats you would face, if you adopted that strategy.

Having done this, it may be clear that your organization is unlikely to be able to make a success of some of the generic strategies.

Step 2: Use Five Forces Analysis to understand the nature of the industry you are in.

Step 3: Compare the SWOT Analyses of the viable strategic options with the results of your Five Forces analysis. For each strategic option, ask yourself how you could use that strategy to:

Reduce or manage supplier power.

Reduce or manage buyer/customer power.

Come out on top of the competitive rivalry.

Reduce or eliminate the threat of substitution.

Reduce or eliminate the threat of new entry.

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