This is first in the infinite series of articles, establishing correlation among #cost#strategy#profitability of a business organization and how an organization can use their interplay, for sustainable competitive advantage.
What is STRATEGY?
Strategy specifies how an organization matches its own capabilities with the opportunities in the market place. Strategy describes how an organization can create value for its customers while differentiating itself from its competitors.
The essence of Strategy is choosing a unique and valuable position rooted in activities that are much more difficult to match. Operational Effectiveness, although necessary to superior performance, is not sufficient, because its techniques are easy to imitate.
For example, when Marketing is strategy, the important question is not “What else can we make?” but “What else can we do for our customers?”
In formulating a Strategy, an organization must first thoroughly understand its industry. Industry analysis focuses on five forces:
- Potential new entrants
- Equivalent products
- Bargaining power of customers
- Bargaining power of input suppliers
The collective effect of these five forces shapes an organization’s profit potential. In general, profit potential decreases with greater competition, stronger potential entrants, products that are similar, and more-demanding customers and suppliers. To respond to these challenges, one may choose one of the two basic strategies: differentiating one’s products or achieving cost leadership.