Business Strategy is Crucial for Competitive Advantage

Strategy is a high-level plan to achieve one or more goals under conditions of uncertainty, based on consideration of resources and an assessment of the internal and external environments in which the organization competes. Usually, a business strategy is for a period of about three to five years; sometimes, it could be a longer period. It is usually formulated by the senior leadership of the organization.

Strategy determines the long-term direction and scope of an organization by the allocation of resources to meet the needs of markets and stakeholders. Michael Porter, a professor at Harvard Business School, thinks that strategy should not only define and communicate the organization’s unique and valuable position but also determine how to combine the organizational competencies, skills, and resources to create a competitive advantage. Strategy is applicable at three different levels – corporate, business unit, and team.

Some organizations have multiple business units, operating in multiple markets. The overall strategy of such an organization is corporate strategy. Such a strategy seeks to structure the general business such that all the units gel together to create more value than they could individually.

Some of the ways of doing this are by (1) Building strong internal competencies, (2) Sharing technologies and resources between units, (3) Raising capital in a cost-effective manner, and (4) Building and maintaining a solid corporate brand. There are several tools that one can use for this type of strategy, namely, the Boston Matrix, Porter’s Generic Strategies, the ADL Matrix, and VRIO Analysis.

Each business unit needs to figure out how it will operate in its own market and operationalize the corporate strategy in order to achieve the long-term objectives and goals of the organization. There are several ways you can do this.

For instance, you could use USP Analysis, SWOT Analysis, or Porter’s Five Forces Analysis. Porter says that the five forces that determine the competitive intensity, and therefore the attractiveness of a market, are (1) Threat of new entrants, (2) Threat of substitute products or services, (3) Bargaining power of customers or buyers, (4) Bargaining power of suppliers, and (5) Intensity of competitive rivalry.

The greater the profitability in a market, the higher the likelihood of the entry of new firms into the market. As new firms enter the market, the profitability of existing firms decreases. The entry of new firms is influenced by factors like barriers to entry (patents etc.), government policy, capital requirements, economies of scale, brand equity, access to distribution, etc.

The existence of substitute products or services undercuts one’s competitive advantage. Factors determining the influence of substitutes are buyer propensity to substitute, relative prices, buyer switching costs, product differentiation, etc.

The bargaining power of customers depends on the relative concentrations of buyers and firms, the degree of dependence on channels of distribution, relative switching costs, availability of substitutes, buyer price sensitivity, etc.

The bargaining power of suppliers is influenced by relative switching costs, degree of differentiation of inputs, presence of input substitutes, the strength of the distribution channel, supplier-to-firm concentration ratio, labour unions, etc.

The intensity of competitive rivalry depends on innovation ability, level of advertising, firm concentration ratio, and powerful competitive strategy.

The third level of strategy is team strategy. Increasingly, most of the work in organizations is being done by teams. The contribution of each team to the organization is different, hence the need for team-level strategy. The team’s strategy should cohere with the strategies and objectives of the business unit where the team is working and the organization. A team charter needs to be drawn up, which defines the team’s purpose and boundaries. Then the team needs to be managed using techniques like Management by Objectives, key performance indicators, etc.

Alternatively, the third level of strategy can be thought of as operational strategy, that is, how each part of the business unit is organized to deliver the corporate and business-unit level strategy. The focus at this level of strategy is on the issues of deployment, optimal utilization, and performance of resources, processes, and people.

D. Samarender Reddy

Holds degrees in Medicine (MBBS) and Economics (MA, The Johns Hopkins University). Certified programmer. An avid reader. Worked in various capacities as a medical writer, copywriter, copyeditor, software programmer, newspaper columnist, and content writer.

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