Business Strategy in Profit-Making Process

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Table of Contents

Business Strategies
The Importance of Business-Level Strategy
The Process of Strategy’s Creation and Implementation
Tools and Models for Internal and External Analyses
Types of Strategies
Conclusion
Reference List

Business Strategies

Many scholars and practitioners have been investigating the essence of a business strategy. Most of them conclude that the latter is a crucial aspect to gain profits. Hence, research on the process of creating this strategy, identifying its importance, examining tools and theories to choose the appropriate one seems relevant. Below, an analysis of the mentioned aspects will be conducted in a consistent and coherent manner.

The Importance of Business-Level Strategy

The term strategy refers to an interconnected set of long-term measures, or approaches, to strengthen the viability and power of the organisation in relation to its competitors. Essentially, it is a set of rules for making decisions that guide the organisation in its activities. There are plenty of external factors that motivate the creation of a company’s business-level strategy. In almost any period, a market provides several opportunities for the growth of the company, regardless of what stage of activity this market itself is at. It should be admitted that a firm’s internal resources are not enough to create and implement a business-level strategy.

The primary resource for this strategy and its implementation is an understanding of its importance and significant experience in improving and realisation of it within the scope of the business model of the company. Then, the minimum – but not the sufficient – requirement is a motivation of a company’s employees. If managers or executives are not ready to implement the tasks within the framework of the strategy, then the mentioned model, regardless of the effectiveness incorporated into it, will not be successful.

A coherent and consistent strategy provides the central guidelines for the improvement of the company’s performance, allowing identifying both internal and external opportunities for the development process. However, the presence of this strategy cannot guarantee significant profit margins and competitive advantages (Lazzari, 2019). Strategic management and the clear determination of aims establish notable conditions for the development of the enterprise, as well as the appropriate distribution of resources.

The strategy itself will not be implemented in any form without proper organisation and implementation of the strategic management element. The latter, as an integral part of a firm, is one of the cardinal differences between the business-level strategy and other forms of organisation of the company. Most policies do not have it, and all business processes are usually regulated by tactical tools. Tactical management undoubtedly has several advantages, such as a high speed of making changes to a single business process. Still, to implement the business-level strategy, tactical management alone is not enough.

If, until this strategy was developed, the company did not have a capable strategic management unit, then its development is the primary prerequisite of the business model’s success. Its functions include not only the creation of the strategy and its implementation. There is also the development of strategic goals, taking into account maintaining control over business processes through performance indicators. Analysis of the existing business model and its transformation is also one of the critical functions of top managers. Hence, the importance of the business-level strategy indicates the necessity of efficient strategic management.

In the framework of the business model, professional leaders and business-level strategy are a great competitive advantage, which can become the main argument in the struggle for a market share. Competitive strategies are aimed at ensuring that the company is able to take a stable and profitable position in the industry in which it operates (Kumar, 2020; Taylor, 2020). Competition unfolds only between companies that have decided on a positive format and strategy vector. The strategies themselves will be crucial competitive advantages (Mohr, 2019). Their quality defines a company’s place in the market among numerous competitors. This quality should be understood as the number of components of development directions, as well as an assessment of their effectiveness, taking into account the maximum number of factors. Hence, it seems reasonable to state that the business-level strategy and the sufficient strategic management that maintains it are a foundation for gaining competitive advantages.

It should be mentioned that in the strategic planning process of a company, there are some mistakes that might take place. The most common ones are the assumption that the market will develop constantly, and that competitors will behave the same; indeed, conditions are more complicated. First, the environment in which the company exists is changing continuously; second, competitors are not standing still and also pursue the goal of performance improvement. Thus, the need for strategic planning is justified by the fact that the business environment is not stable, and the future is rather uncertain. It is tough to accurately predict the activities of a company for many years ahead. Nevertheless, it is quite possible to identify market development trends and factors that will affect a particular business to obtain a competitive advantage.

The Process of Strategy’s Creation and Implementation

The process of the development of a business strategy should be considered as an essential element of any company’s or entrepreneur’s way of success. Businessmen have always been emphasising the latter statement as, according to their experience, it is a foundation for the coherent and smooth functioning of their enterprises (Seth, 2019). However, there are plenty of approaches to the mentioned process, so the quantity and names of the stages vary considerably.

As stated above, there are different visions on how to organise the process of strategies’ creation, as well as implementation. The phases fall in the range between four and six (Clayton, 2019; McDonald, 2015; Essentials guide, no date; 6 steps, 2019). Nevertheless, all the sources claim approximately the same – the only substantial difference is in formulations. The essence of this process might be determined as setting concrete goals and their consistent realisation step-by-step without an unnecessary rush, applying related business analysis tools such as SWOT (Richards, no date; Clayton, 2019). However, it is vital to define what each phase aims to achieve and why.

It seems reasonable to adhere to the 6-stage approach because it contains the most consistent and clear rationale. The first phase relates to the definition of the company, which means that it has to identify its target market, goals and the requirements of potential customers. “Without a strong customer base whose needs are being filled, an organisation will not be successful” (6 steps, 2019). The firm is to figure out the factors that are of the greatest value for clients. One of these factors is whether a customer can buy products or services at lower prices than the company offers.

The second stage is to define the firm’s strategic mission that provides a long-term perspective of what the company aspires to achieve. “A clearly stated mission will provide the organisation with a guide for carrying out its plans” (6 steps, 2019). Components of a solid mission have to include the organisation’s values, the nature and scope of the business, visible competitive advantages and the vision of future activities. This stage creates a foundation for the operating of the firm as a whole.

Then, the third stage is the formulation of the strategy, which implies the identifying of the performance goals required to attain distinctly settled objectives. The latter can consist of “market position relative to the competition, production of goods and services, desired market share, improved customer services, corporation expansion, advances in technology, and sales increases” (6 steps, 2019). These objectives should be consented with all employees and stakeholders to ensure significant profit margins in the future. Moreover, the personnel is to have clear individual roles according to stated responsibilities.

The following stage is to formulate a competitive strategy, which means that the company should find out its marketplace and what to do to survive in competition. Each unit of the firm must be aware of its targets and act in accordance with defined objectives and propose any improvements that might strengthen competitiveness (6 steps, 2019). Moreover, the enterprise should develop a flexible tactic of how to adapt to changeable conditions pf the market. It should be ready for any possible events and take action when necessary. At this stage, the company should apply complex research on the market’s peculiarities using such tools as SWOT, PESTEL or Porter’s five forces analysis.

The fifth phase implies the realisation of the formulated strategy. The firm may fulfil all the required stages to comprehend the market, determine itself and identify the competition. Nevertheless, “without implementing the strategy, the organization’s work will be of little to no value” (6 steps, 2019). The methods applied for the implementation of a strategy are known as a tactic. The latter is the individual actions that allow the company to realise its general goals.

The final stage is the evaluation of progress, which is vital to assess whether the enterprise will remain profitable further. “An organization must keep track of the progress it is making as defined by its strategic plan” (6 steps, 2019). If performance is far from acceptable, it is essential to be adaptable and change the ongoing strategy. The appropriate evaluation indicates the importance of transparent accountability and constant market monitoring.

It might be summarised that the mentioned stages are intersected and interdepended – none of these phases can be performed separately without considering the outcomes of the previous and preparing a foundation for the following one. However, the most important step may be the fourth one – identifying the competitive strategy. It is vital to determine the extent of competition, taking into account various factors – from the buyers’ power to the threat of substitution.

Tools and Models for Internal and External Analyses

For an enterprise, it is important to conduct continuous investigations of its performance. The latter is affected by both internal and external business environments, which contain a plethora of factors to consider (Williams, 2019; Kimberlee, 2019). Since the beginning of the 20^th century, scholars and practitioners have developed plenty of tools and models for assessing the mentioned environments. Hence, in order to figure out what benefits such analyses may bring, it might be rational to describe the four most popular tools for environmental analysis. Among them are SWOT, Porter’s value chain, Porter’s five forces and PESTEL.

SWOT is a universal strategic management technique; the object of SWOT can be any product, company, store, factory, country, educational institution or even a person. Companies conduct a SWOT analysis not only on their own product but also on the competitors’ one. This tool clearly organises all the information about the internal and external environment of any firm. The primary advantage of SWOT is that it allows looking at the position of a company, product or service in the industry (Grant, 2020). Therefore, it is among the most popular tools in risk management and decision-making. SWOT is aimed to provide exhaustive information on strengths, weaknesses, opportunities and threats that are the elements of the tool.

Porter’s value chain is a series of sequential actions by a company to transform resources into a final product or service. In a general sense, this is a tool aimed at strategic planning, with the goal of a detailed study of the organisation. This chain is a practical model for summarising the challenges that the enterprise faces, allowing identifying potential opportunities necessary to achieve a competitive advantage for the organisation. In fact, every type of activity in the value chain is a potential source of competitive advantage (Tardi, 2020). This ultimately depends on knowledge of the industry structure, the choice of a standard strategy and those types of activities in the value chain that contain the maximum potential for enterprise competitiveness.

Michael Porter’s five forces theory for assessing potential risks was developed in the late 1970s but has remained accessible to this day. It consists of evaluating possible adverse events that may somehow affect the business in the future. The analysis is carried out in the context of 5 factors, or the so-called forces. Porter claimed that each of these factors exerts a certain pressure on the business (Chappelow, 2020). To some extent, they are considered external because the company cannot influence them in any way. This analysis method allows evaluating the prospects for business development in 5–10 years or more. Thus, it will be relevant if one plans to launch a new development strategy, release a new product or announce a service.

PEST analysis is indispensable for researching business conditions that a person cannot directly influence. Actually, the abbreviation PEST combines political, economic, social and technical factors that business people, marketers and managers strive to evaluate. In addition, PEST analysis helps to study market and consumer trends that directly affect the company’s sales and profits. From the angle of economics, the main task of PEST analysis is to determine the current resource allocation at the state level (Kenton, 2020). Social conditions are no less important as the consumption of the final product of the company depends on them. Technological factors become the causes of a sharp change in market conditions and the resulting ups and downs of individual players. The modification of the model is PESTEL, in which ecological and legal factors are also considered.

Thus, tools and models for internal and external analyses are an instrument for assessing and creating a strategy for the development of an enterprise’s activity that is founded on examining the following aspects. These common aspects are the efficiency of resource use, performance and profitability, which helps to identify competitive advantages at different stages of the business cycle. With their own set of indicators, the described analyses provide the relationship between the strategic and operational activities of the organisation, its strategy and financial goals. They give information about the market prospects of existing products, their durability and product portfolio, as well as help to develop a plan for creating new business segments.

Types of Strategies

Typology of Miles and Snow

The typology is based on the idea that managers aim to formulate strategies that meet the requirements of the external environment. Miles and Snow identify four such strategies: search, market share protection, analysis and response (Heil, no date). The organisation that has adopted the search strategy (prospector) is ready for innovation, risk, seeking new opportunities and striving for growth. A search strategy is appropriate in a dynamic environment where creativity is more important than productivity.

The activities of an organisation focused on defending a market share (defender strategy) are directly opposed to the actions of a prospector organisation. It is not associated with risk and the search for new opportunities but is focused on stability or even on cost reduction. The goal of this strategy is to preserve existing customers and not to innovate or seek growth opportunities. An organisation that uses an analyser strategy tries to maintain a stable business by innovating on the periphery. The analysis strategy occupies an intermediate position between the policy of search and the protection of market share. Then, a reaction strategy (reactor) is not a strategy at all. Rather, organisations react to dangers and opportunities with the sole aim of adapting. In reactors’ strategies, top managers do not develop a long-term plan or do not offer the organisation a clearly defined mission and goal.

Porter’s Generic Strategies

According to Porter, a competitive strategy is a list of actions that a company carries out to obtain higher profits than competitors. Due to a practical approach, the firm attracts consumers more quickly, incurs lower costs for attracting and retaining customers and receives better margins. Porter identified four types of basic competitive strategies in the industry (Kuijk, 2018; Figure 1). The choice of the kind of competitive strategy depends on the capabilities, resources and ambitions of the company in the market.

Porter’s matrix of competitive strategies is based on two parameters: market size and type of competitive advantage. Market types can be broad (large segment, whole product category, entire industry) or narrow (small market niche, accumulating the needs of a very restricted or specific target audience) (Pulaj, Kume and Cipi, 2015). The type of competitive advantage can be of two options: low cost of goods or a wide variety of assortment. Based on this matrix, Michael Porter identifies four main strategies for the company’s behaviour in the industry. A competitive product leadership strategy, or differentiation, means creating a unique product in the industry. The second one is a competitive cost leadership strategy or price leadership, which means companies’ capability to achieve the lowest cost level. The third and fourth are competitive focus strategies, or leadership in a niche, which means focusing all the company’s efforts on a specific narrow group of consumers.

Figure 1. Porter’s generic strategies (Kuijk, 2018)

Bowman’s Strategic Clock

Bowman created a significant strategy clock that expanded Porter’s approach (Riley, 2015; Figure 2). It should be claimed that companies usually do not choose competition in the first position. They exist in a discounted goods market, and not many firms want to be in it. Rather, they are forced into this position because their product does not have differentiated value. Organisations in the second position are low-cost leaders; these are enterprises that go to lower prices to bare lows; they balance with a shallow margin and with very high turnover.

Then, hybrids offer products at a lower cost, but with a higher perceived value than their budget brothers. Turnovers are a problem here, but these companies build a reputation by offering fair prices for reasonable goods. In the fourth position, there are firms that provide their customers with a high perceived value. They either increase the cost and support themselves even with low turnover, or they keep their prices low and seek more significant market share. The fifth position is for companies offering high perceived value and high prices. The product does not have to have real value, but the perception of value is enough for the client to give money for the product.

Furthermore, the sixth position implies that businesses simply raise the price without adding value at times. When the price rises, the profitability of such a company will also increase. The seventh category is a classic example of monopoly pricing in a market where only one company offers a product or service. Finally, the eighth position indicates that any company that implements this type of strategy will lose market share (Bhasin, 2019). It should be stated that the latter three categories are not viable strategies in genuinely competitive markets.

Bowman's strategic clock (Riley, 2015) — Figure 2. Bowman’s strategic clock (Riley, 2015)

Conclusion

In conclusion, it seems reasonable to state that the above investigation indicates the necessity of an efficient business strategy for a firm. It was claimed that the process of creating and implementing this strategy might have six stages, among which the fourth one – developing competitive strategy – seems the most important. Tools and models for analysing a business environment were discussed. Finally, three approaches to choosing a business strategy were identified.

Reference List

6 steps to formulating your business strategy (2019)
Bhasin, H. (2019) What is Bowman’s strategy clock? Web.
Chappelow, J. (2020) Porter’s 5 forces.Web.
Clayton, J. (2019) The five stages of the strategic management process. Web.
Essentials guide to strategic planning (no date) Web.
Grant, M. (2020)Strength, weakness, opportunity, and threat (SWOT) analysis. Web.
Heil, K. (no date) Miles and Snow typology. Web.
Kenton, W. (2020) PEST analysis. Web.
Kimberlee, L. (2019) Internal & external strategic plan development. Web.
Kuijk, A. (2018) Porter’s generic strategies. Web.
Kumar, V. (2020) Business Strategy is so important for all size of organisation – why and how?Web.
Lazzari, Z. (2019) The importance of business strategies. Web.
McDonald, J (2015) 6 steps to create an effective business strategy. Web.
Mohr, A. (2019) The importance of strategic planning. Web.
Pulaj, E., Kume, V. and Cipi, A. (2015) ‘The impact of generic competitive strategies on organizational performance. The evidence from Albanian context’, European Scientific Journal, 11(28), pp. 273–284.
Richards, L. (no date) Development of business strategies. Web.
Riley, J. (2015) Bowman’s strategic clock (strategic positioning). Web.
Seth, S. (2019) Business development: The basics. Web.
Tardi, C. (2020) Value chain. Web.
Taylor, A. (2020) Why business strategy is becoming more important in the marketplace. Web.
Williams, R. (2019) Why is an internal analysis important?Web.

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