Business Strategy describes a series of decisions that are made by the management of a company in order to obtain or maintain a competitive advantage over a period of time. It shows the overall direction of the company. It is also future focused and contains long-term sustainable goals.
A good business strategy will have the following characteristics:
- A clear direction of where the company is going and the steps necessary to execute the decision.
- An understanding of what the company’s core competencies
- are currently, as well as what competencies need to be developed in the future.
- Will solve marketplace demands and address real customer needs..
- Will contribute to a sustainable competitive advantage.
- Will be properly documented but flexible enough to change according to the environment.
The three best strategies:
Cost Leadership
Product Differentiation
Market Segmentation
Cost leadership
This strategy is similar to the Walmart model. The company focuses on building a large market share by providing prices that are lower than its competitors. Typically, such customers are less loyal and are more price-sensitive. To succeed at offering the lowest price, but still maintain profitability and a high return on investment, the company must operate very efficiently. As such, the company must be able to control its operational costs tightly.
Three main ways to achieve:
High Asset Turnover
This simply means how fast can a company sell its product. Or if it’s in the service industry, how fast can the business finish providing services for one client and move on to additional paying clients. These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i.e. the firm hopes to take advantage of economies of scale and experience curve effects.
Indirect Operating Costs
The key focus is to control costs. This is achieved by offering high volumes of standardized products, offering basic no-frills products, and limiting customization and personalization of service. Production costs are kept low by using fewer components.
Supply/Procurement Chain
This could be achieved by bulk buying to enjoy quantity discounts, squeezing suppliers on price, instituting competitive bidding for contracts, working with vendors to keep inventories low using methods such as Just-in-Time purchasing or Vendor-Managed Inventory.
Product Differentiation
This strategy requires the company to develop products that are “Better Than” or “More Unique Than” its competitors. The main focus is to differentiate itself from its rivals. Such differentiation factors can be higher-end quality materials, better customer service, more unique company image or branding, or other customer focused values. Typically, companies pursuing this strategy can charge premium pricing, since their customers tend to be more loyal and less price-sensitive. A negative side to this strategy is that in order for the marketplace to recognize such differentiation, a large amount of advertising money is typically spent.
Market Segmentation
Market Segmentation is simply focusing on a niche or sub-market to sell your products or services to. This strategy is best when you are competing in an overly saturated market.
For example, the gift basket industry is highly competitive and overly
saturated. If you choose to enter the field, you might choose a product differentiation strategy and combine it with an appropriate market segmentation strategy. Hence, you might focus on selling high-end products to the wedding market. As such, your gift baskets might sell high-end crystal champagne glasses specifically targeted to the bride and groom.
How to create the strategy
STAGE #1
Identify key strategic factors you want the business to focus on.
STAGE #2
Utilize strategic analysis tools, like the SWOT analysis, Balanced Scorecard, BCG Matrix, etc., to analyze both internal and external factors of your business.
STAGE #3
Weigh the attractiveness of the various strategies and decide on which is most advantageous for the company to pursue.
