Developing a Business Strategy
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A common method for assessing an industry's external environment is to use Michael E Porter's 5 Forces Model. Porter is a renowned professor at the Harvard Business School and author of many widely accepted strategic business tools. The 5 forces analysis allows for the evaluation of information related to an industry's rivalry (or competitive intensity), threat of substitutes, threat of new entrants, power of buyers, and bargaining power of suppliers. It will help characterize the competitive environment in the industry and whether or not that environment is favorable or unfavorable to the companies within it. This step is critical in the strategy development process as it allows a company to identify the key success factors within its industry. Once key success factors are identified, a firm can begin to look internally to determine if they have those factors are present in their firm.
Porter's Value Chain is an effective tool used to identify a firm's internal activities. Both primary and secondary activities are evaluated and examined in an effort to identify the firm's core competencies. Ideally, a company's core competencies will correspond with the key success factors identified in the external analysis. If they do not, the firm needs to critically evaluate how it can meet those factors.
Once the analyses are complete, the firm has the information it needs to make a strategic decision about its products/services. Ultimately, there are really just two strategies that a company can pursue when it comes to a specific product or service. They can either try to be the price leader in their industry, or they can pursue a differentiation strategy.
A price leadership strategy might be a wise route when a key success factor is your ability to minimize cost (also known as cost leadership). If this is also a core competency of yours because of superior supply chain management, or maybe a technological edge that your competitors don't have, than you have achieved what any and every business is after: a sustainable competitive advantage.
Product differentiation might be a better strategy to pursue in industries where customers are looking for something more specialized. In this scenario, the product must be different than the competition and provide value that the others don't. If a company can deliver a product that is different than the competition and is in demand amongst potential buyers, then that sustainable competitive advantage is theirs.
Developing a comprehensive business strategy is necessary exercise for any company that hopes to succeed in a competitive industry. A company must identify goals, how those goals can be achieved and the specific processes that must be followed. External and internal analyses will lead the way and ultimately allow the company to determine if a sustainable competitive advantage is within its grasp.