A strategic organization chooses how it will compete with other organizations in its industry. A strategic organization considers the structure of its industry and chooses how it will position itself in relation to the other organizations in the industry.
It also determines what resources it has and which resources it needs to compete effectively. Finally, it decides on a specific strategy that will put it ahead of the competition.
There are four basic competitive strategies that any organization can choose. These are: price competition, niche competition, product innovation, and market competition. Each of these has its own set of risks and rewards, so selecting one requires careful thought.
Price competition is choosing to compete based on the lowest price for a good or service. This strategy risks losing profit margins if competitors lower their prices to match yours. However, it can also attract more customers who are looking for the best deal.
Niche competition is choosing to only serve a specific group of people with your product or service. This limits your audience size, but increases customer satisfaction due to meeting their needs.
Product innovation is introducing new products or services that are better than what is currently on the market. This can be risky as there is the possibility that your new products or services do not meet customer needs and are not popular.
Organization
Another important aspect of the five forces model is the organization itself. The organization’s structure, how it communicates, and how it distributes resources all play a part in the competitive strategy it chooses.
A cohesive team that collaborates well will produce better results than a team that is full of conflict. This is mentioned in our article on the environment factor of the five forces model.
Companies with more transparent communication and resource distribution will also have teams that perform better. When people feel like they are being listened to and are given what they need to succeed, they will be more invested in the company.
Internal conflict and lack of investment from employees leads to lower productivity and higher turnover, both of which hurt a company. A company that knows how to invest in its employees and internal coordination will fare better than ones that do not.
Competition
When deciding on a competitive strategy, your organization should consider the competitiveness of the industry. If there are many companies in the industry, it will be harder to win customers away from their products.
If there are few companies in the industry, your organization may have to spend more money to build the infrastructure to produce and deliver its product. This may make it more difficult to turn a profit.
Your organization should also consider how competitive the market is. If buyers have high expectations for quality and price, then your organization will have to meet those expectations or face difficulties in gaining and keeping customers.
Finally, your organization should consider internal factors such as resources, skills, and capacity when choosing a competitive strategy. If your organization does not have the resources to compete at a higher level, then it may be best to choose a less aggressive strategy.
Strategy
Choosing a strategy is the second step in the process. Once an organization understands its environment and its strengths and weaknesses, it can choose one of three main strategies to pursue.
These strategies are called market penetration, market share, and strategic niche. Each of these strategies is described below.
Market penetration strategy is designed to bring in new customers by offering superior products or services at a lower price. This effort seeks to attract new customers from outside of the current customer base while still maintaining some loyalty from existing customers.
Market share strategy is designed to maintain or increase the size of the current customer base by offering similar products or services at a similar price as competitors. This effort seeks to maintain customer loyalty as well as recruit new ones by being comparable to other organizations.
Strategic niche is an effort to focus on a specific segment of customers that like your product or service and seek to only improve that part of the product or service. This minimizes cost while still retaining some customers.
Selecting a strategy
Once an organization understands its environment, its capabilities, and the markets in which it participates, it’s time to select a strategy.
Strategies can be categorized into two broad groups: defensive strategies and offensive strategies.
Defensive strategies are designed to protect the existing business from threats. These include cost-focused strategies (such as reducing costs to maintain a competitive advantage in the market) and value preservation strategies (such as investing in R&D to maintain current product quality).
Offensive strategies are designed to capture new opportunities in new markets. These include growth strategies (such as targeting new markets ornew product or service offerings) and market sharing strategies (such as targeting competitors’ customers by offering similar products or services).
When an organization chooses a strategy, it must also assess its likelihood of success. Will the strategy succeed? Can the organization carry out the strategy? Does the organization have the capability to execute this strategy? All of these questions need to be answered truthfully.
Cost leadership
If your organization determines that its competitors are creating similar products at a lower cost, then your organization can choose a cost leadership strategy.
By producing the same quality product at a lower cost, your organization can gain more market share as customers look for the best value. A key element of this strategy is to maintain a low cost structure.
By investing in the latest technology and efficient processes, this can be achieved. This also requires a thorough understanding of all the costs involved in producing the product or providing the service.
Another way to achieve cost leadership is to find the lowest-cost suppliers and invest in improving your organization’s productivity so that you can produce more with the same resources.
When your organization is no longer able to maintain its competitive advantage via this route, then it should transition to another strategy. This strategy is very effective for organizations that are just starting out or are producing only one product or service.
Differentiation
A differentiation strategy tries to position your organization as unique or distinctive in the market. You market yourself as having unique products or services, or a unique approach or method.
Differentiation is not about being better than other organizations, but about being different than them. You attempt to match your strengths and weaknesses with those of your competitors, but you aim to be different in how you serve the market.
Your organization may choose this strategy if it cannot effectively compete on price or service quality, because then you can at least claim to be different than your competitors.
Differentiation is a risky strategy, however, because it does not guarantee customers will buy from you. If your organization does not have quality products or services, then no one will purchase from you no matter how distinct you are.
This strategy can also be difficult to shift from due to its inherent qualities. If someone finds your organization distinctive, it can be hard to convince them that they are not when they start offering similar products or services.
Focus
An organization can focus on a specific segment of the market, such as a specific type of customer or a particular product category.
By serving a narrow segment, an organization can better understand its customers’ needs and how to best meet those needs. This can create loyalty among customers, which leads to greater profits in the long run.
Narrowing the scope of an organization’s activities also makes it easier to manage and coordinate operations. Managers can more easily allocate resources because they know exactly what they are working with.
Choosing a narrow focus is not without its risks, however. An organization that focuses on one type of customer may find that customer switching to competitors who serve that customer’s needs better.
And if the demand for that type of customer changes, the organization may need to make costly changes to return to profitability. Therefore, choosing to focus is an organizational decision that requires weighing the risks and rewards.
Integration
Integration is the strategy where a company tries to control all parts of the industry. This is done by acquiring other companies that are involved in all stages of the industry circle.
For instance, a company that specializes in producing products would try to also produce its own components, manufacture its products, and sell them. This way, they would have more control over the entire process, and would not have to worry about outside suppliers.
The downside to this strategy is that you now have to manage all of these other companies and businesses, which can become time-consuming and expensive.
You also run the risk of exposing your company to competition, as you give other companies access to all parts of the production process.
Integration is a very aggressive strategy and one that few companies use due to the risks it presents.
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