ENTREPRENEURIAL

STRATEGY
THE BUSINESS ENVIRONMENT

Prepared by: CHRISTIAN P. TAN

The Importance of Business Environment
 Business environment is the surrounding for the firm in which
it operates.
 Identification of opportunities: For identifying the
opportunities and getting the benefit of being first in that
particular business or getting the first mover advantage. If a
firm is able to identify the opportunities existing in the
business environment early it will help the firm to be the first
to exploit them instead of losing them to competitors.
 Identification of threats: Firms can identify threats in the
business environment and develop an early warning system.
 Adapting to fast changes: Weather a firm is large scale,
medium scale or small scale, they are facing a business
environment which is dynamic and where changes are
taking place rapidly. For coping up with these significant
changes effectively the firms must understand and
examine the environment and develop suitable strategies
for future.
 Enhancing performance: if a firm is continuously
monitoring its environment then it can identify the strong
and weak signals from the environments and on the basis
of these signals it can formulate the strategies for suitable
business practices. These strategies will not only to only
improve their present performance but also continue to
improve their business in the market for a longer period.
 Business and its external environment interact in three ways - exchange of
information, exchange of resources and exchange of influence and power.
Identifying Entrepreneurial
Opportunities
 External Environment (what business potentials exist): a
study of general trends and the dynamics of competition
within an industry can highlight opportunities that match
the unique capabilities of the entrepreneurs

 Internal Environment (reveals what the venture is able to

do): Competitive strengths so that these can be matched
with market needs and other external opportunities.
Assessing Potentials in the External
Environment
 Impacts the growth and profitability of firms.
 General Environment: broad, encompassing factors that
influence all business in a society.
 Industry Environment: narrow, the combined forces that
directly impact a given firm
General Environment
 The external environment is divided into two parts:
 Directly interactive: This environment has an immediate
and firsthand impact upon the organization. A new
competitor entering the market is an example.
 Owners expect managers to watch over their interests
and provide a return on investments.
 Customers demand satisfaction with the products and
services they purchase and use.
 Suppliers require attentive communication, payment, and
a strong working relationship to provide needed
resources.
 Competitors present challenges as they vie for customers
in a marketplace with similar products or services.
 Employees and employee unions provide both the people
to do the jobs and the representation of work force
concerns to management.
 Indirectly interactive: This environment has a secondary
and more distant effect upon the organization. New
legislation taking effect may have a great impact.
 Sociocultural (what’s the latest consumer
trends) dimension is especially important because it
determines the goods, services, and standards that society
values. The sociocultural force includes the demographics
and values of a particular customer base.
 Demographics are measures of the various characteristics
of the people and social groups who make up a society.
Age, gender, and income are examples of commonly used
demographic characteristics.
 Values refer to certain beliefs that people have about
different forms of behavior or products. Changes in how a
society values an item or a behavior can greatly affect a
business. (Think of all the fads that have come and gone!)
 political and legal dimensions (What Regulations Restrict Our
Activities?) of the external environment include regulatory
parameters within which an organization must operate.
Political parties create or influence laws, and business
owners must abide by these laws. Tax policies, trade
regulations, and minimum wage legislation are just a few
examples of political and legal issues that may affect the
way an organization operates.
 technological dimension (Can Technology Help us Do It?) of the
external environment impacts the scientific processes
used in changing inputs (resources, labor, money) to
outputs (goods and services). The success of many
organizations depends on how well they identify and
respond to external technological changes.
 economic dimension (What's Happening in the
Economy?) reflects worldwide financial conditions. Certain
economic conditions of special concern to organizations
include interest rates, inflation, unemployment rates,
gross national product, and the value of the U.S. dollar
against other currencies.
 The global dimension of the environment refers to factors
in other countries that affect Philippine organizations.
Although the basic management functions of planning,
organizing, staffing, leading, and controlling are the same
whether a company operates domestically or
internationally, managers encounter difficulties and risks
on an international scale. Whether it be unfamiliarity with
language or customs or a problem within the country itself
(think mad cow disease), managers encounter global risks
that they probably wouldn't have encountered if they had
stayed on their own shores.
Internal Environment
 The internal environment assessment and analysis is
conducted after the external environment analysis. While
the external environment analysis seeks to identify
opportunities and threats in the external environment,
 the internal environment analysis seeks to identify the
strengths and weakness in your business.
 Note that it focuses on factors that are internal to your
business, some of which can be easily changed or
improved upon. The 7's model is particularly useful when
identifying internal factors in your business
The 7s of Internal Environment
1. Strategy
 Do your strategies take into account the short term, medium term and long
term?
2. Structure
 Do you have a formal organizational structure in place?
 Are clear lines of reporting or communicating present?
Line
 The traditional line structure is organized in such a
way that a president or CEO (Chief Executive Officer) is at
the top. Then there are the directors or VPs (Vice-
Presidents) of specific areas, followed by managers, and so
on, until the operational personnel. This structure can be
seen below:
 It’s a very rigid structure, with little information exchange,
typical of bureaucratic companies in which there is little
collaboration.
 Nowadays it’s unusual, but in the past it was practiced in
military, religious, and even academic organizations. In this
way, one area doesn’t interfere with the work of another,
and the staff only obeys the ‘orders’ of the immediate
superior.
Functional Organization Structure
 Under a functional organization structure, people who do
similar tasks are grouped together based on specialty. So
all the accountants are placed in the finance department
and so on for the marketing, operations, senior
management and human resources departments
 The advantages of this kind of structure include quick
decision making, because the group members can easily
communicate. They can also learn from each other, since
they already possess similar skill sets and interests.
 the difference is that employees in an area need to report
to all the directors.
Line-and-staff
 It’s similar to the line structure, except that in this
case the staff advises, gives opinion, makes reports,
authorizes and supports the organization.
 Organizational structure examples of this type include
insurance companies, engineering firms, law firms,
regulatory agencies, etc. In other words, organizations
that need isolated technical advice to assist employees
who handle or manage the day-to-day operations on the
front line.
Divisional Structure Based on Products
 In a divisional structure, your company groups workers
into teams based on the products or projects that meet
the needs of a certain type of customer.
 For example, a bakery with a catering operation might
structure the workforce based on key clientele, such as a
wedding department and a wholesale-retail department.
The division of labor in this kind of structure ensures
workers making similar products can achieve greater
efficiency and higher output.
Matrix Structure Combines Functional and
Divisional Models
 A matrix structure combines elements of the functional and
divisional models, so it’s more complex. It groups people into
functional departments of specialization, then further
separates them into divisional projects and products.
 In a matrix structure the team members are given more
autonomy and expected to take on more responsibility for their
work. This increases the productivity of the team, fosters
greater innovation and creativity, and allows managers to
cooperatively solve decision-making problems through group
interaction.
 This type of organizational structure takes lots of planning and
effort, making it appropriate for large companies that have the
resources to devote to managing a complex business
framework.
Flat Organizational Structure
 A flat organizational structure attempts to disrupt the
traditional top-down management system of most
companies. Management is decentralized so there is no
everyday “boss.” Each employee is the boss of
themselves, eliminating bureaucracy and red tape and
improving direct communication.
 For example, an employee who has an idea doesn’t have
to wade through three levels of upper managers to get the
idea to the key person making the decision. The employee
simply communicates directly with the target on a peer-
based level.
 A company adopting this type of structure for everyday
purposes typically establishes a special top-down
management system for temporary projects or events.
3. Style of leadership
 What is your style of leadership?
 Democratic Leadership
 Autocratic Leadership
 Laissez-Faire Leadership
 Strategic Leadership
 Transformational Leadership
 Transactional Leadership
 Coach-Style Leadership
 Bureaucratic Leadership
1. Democratic Leadership
Commonly Effective
 Democratic leadership is exactly what it sounds like -- the
leader makes decisions based on the input of each team
member. Although he or she makes the final call, each
employee has an equal say on a project's direction.\
 one of the most effective leadership styles because it
allows lower-level employees to exercise authority they'll
need to use wisely in future positions they might hold. It
also resembles how decisions can be made in company
board meetings.
2. Autocratic Leadership
Rarely Effective

 the inverse of democratic leadership. In this leadership

style, the leader makes decisions without taking input
from anyone who reports to them. Employees are neither
considered nor consulted prior to a direction, and are
expected to adhere to the decision at a time and pace
stipulated by the leader.
 An example of this could be when a manager changes the
hours of work shifts for multiple employees without
consulting anyone -- especially the effected employees.
3. Laissez-Faire Leadership
Sometimes Effective
 If you remember your high-school French, you'll accurately
assume that laissez-faire leadership is the least intrusive form
of leadership. The French term "laissez faire" literally translates
to "let them do," and leaders who embrace it afford nearly all
authority to their employees.
 In a young startup, for example, you might see a laissez-faire
company founder who makes no major office policies around
work hours or deadlines. They might put full trust into their
employees while they focus on the overall workings of running
the company.
 Although laissez-faire leadership can empower employees by
trusting them to work however they'd like, it can limit their
development and overlook critical company growth
opportunities. Therefore, it's important that this leadership
style is kept in check.
4. Strategic Leadership
Commonly Effective
 Strategic leaders sit at the intersection between a
company's main operations and its growth opportunities.
He or she accepts the burden of executive interests while
ensuring that current working conditions remain stable for
everyone else.
 This is a desirable leadership style in many companies
because strategic thinking supports multiple types of
employees at once. However, leaders who operate this
way can set a dangerous precedent with respect to how
many people they can support at once, and what the best
direction for the company really is if everyone is getting
their way at all times.
5. Transformational Leadership
Sometimes Effective
 Transformational leadership is always "transforming" and
improving upon the company's conventions. Employees
might have a basic set of tasks and goals that they
complete every week or month, but the leader is
constantly pushing them outside of their comfort zone.
 This is a highly encouraged form of leadership among
growth-minded companies because it motivates
employees to see what they're capable of. But
transformational leaders can risk losing sight of everyone's
individual learning curves if direct reports don't
receive the right coaching to guide them through new
responsibilities.
6. Transactional Leadership
Sometimes Effective
 Transactional leaders are fairly common today. These
managers reward their employees for precisely the work
they do. A marketing team that receives a scheduled bonus
for helping generate a certain number of leads by the end of
the quarter Is a common example of transactional
leadership.
 Transactional leadership helps establish roles and
responsibilities for each employee, but it can also
encourage bare-minimum work if employees know how
much their effort is worth all the time. This leadership style
can use incentive programs to motivate employees, but they
should be consistent with the company's goals and used in
addition to unscheduled gestures of appreciation.
7. Coach-Style Leadership
Commonly Effective
 Similarly to a sports team's coach, this leader focuses on
identifying and nurturing the individual strengths of each
member on his or her team. They also focus on strategies
that will enable their team work better together. This
style offers strong similarities to strategic and democratic
leadership, but puts more emphasis on the growth and
success of individual employees
 Rather than forcing all employees to focus on similar skills
and goals, this leader might build a team where each
employee has an expertise or skillset in something
different. In the longrun, this leader focuses on creating
strong teams that can communicate well and embrace
each other's unique skillsets in order to get work done.
8. Bureaucratic Leadership
Rarely Effective
 Bureaucratic leaders go by the books. This style of
leadership might listen and consider the input of
employees -- unlike autocratic leadership -- but the
leader tends to reject an employee's input if it conflicts
with company policy or past practices.
 Employees under this leadership style might not feel as
controlled as they would under autocratic leadership, but
there is still a lack of freedom in how much people are
able to do in their roles. This can quickly shut down
innovation, and is definitely not encouraged for
companies who are chasing ambitious goals and quick
growth.
Leadership Style Assessment
 Leaders can carry a mix of the above leadership styles
depending on their industry and the obstacles they face.
At the root of these styles, according to leadership
experts Bill Torbert and David Rooke, are what are called
"action logics."
1. Individualist

 The individualist, according to Rooke and Tolbert, is self-

aware, creative, and primarily focused on their own
actions and development as opposed to overall
organizational performance. This action logic is
exceptionally driven by the desire to exceed personal
goals and constantly improve their skills.
 I1. "A good leader should always trust their own intuition over established
organizational processes."
 I2. "It's important to be able to relate to others so I can easily communicate
complex ideas to them."
 I3. "I'm more comfortable with progress than sustained success."
2. Strategist

 Strategists are acutely aware of the environments in

which they operate. They have a deep understanding of
the structures and processes that make their businesses
tick, but they're also able to consider these frameworks
critically and evaluate what could be improved.
 S1. "A good leader should always be able to build a consensus in divided
groups."
 S2. "It's important to help develop the organization as a whole, as well as the
growth and individual achievements of my direct reports."
 S3. "Conflict is inevitable, but I'm knowledgeable enough about my team's
personal and professional relationships to handle the friction."
3. Alchemist

 Rooke and Tolbert describe this charismatic action logic as

the most highly evolved and effective at managing
organizational change. What distinguishes alchemists from
other action logics is their unique ability to see the big
picture in everything, but also fully understand the need to
take details seriously. Under an alchemist leader, no
department or employee is overlooked.
 A1. "A good leader helps their employees reach their highest potential, and
possesses the necessary empathy and moral awareness to get there."
 A2. "It's important to make a profound and positive impact on whatever I'm
working on."
 A3. "I have a unique ability to balance short-term needs and long-term goals."
4. Opportunist

 Opportunist are guided by a certain level of mistrust of

others, relying on a facade of control to keep their
employees in line. "Opportunists tend to regard their
bad behavior as legitimate in the cut and thrust of an
eye-for-an-eye world," Rooke and Tolbert write.
 O1. "A good leader should always view others as potential competition to be
bested, even if it's at the expense of their professional development."
 O2. "I reserve the right to reject the input of those who question or criticize
my ideas."
5. Diplomat

 Unlike the opportunist, the diplomat isn't concerned

with competition or assuming control over situations.
Instead, this action logic seeks to cause minimal impact
on their organization by conforming to existing norms
and completing their daily tasks with as little friction
as possible.
 D1. "A good leader should always resist change since it risks causing
instability among their direct reports."
 D2. "It's important to provide the 'social glue' in team situations, safely away
from conflict."
 D3. "I tend to thrive in more team-oriented or supporting leadership roles."
6. Expert

 The expert is a pro in their given field, constantly striving

to perfect their knowledge of a subject and perform to
meet their own high expectations. Rooke and Tolbert
describe the expert as a talented individual contributor
and a source of knowledge for the team. But this action
logic does lack something central to many good
leaders: emotional intelligence.
 E1. "A good leader should prioritize their own pursuit of knowledge over the
needs of the organization and their direct reports."
 E2. "When problem solving with others in the company, my opinion tends to
be the correct one."
5. Skills and competencies

 What skills and competencies are present in your business?

This may encompass:
Leadership skills
 Management skills
 Technical skills
 Interpersonal skills
 Intra personal skills
6. Systems, processes and procedures
 What systems, processes and procedures do have in place or intend to have in
place?
Performance management system
 Financial management system
 Management information system
 Accounting information system
 Quality control system
 Health and safety
 Stock control system
 Cash control system
 Accounting system
 Expense control system
 Debtors control system
 Creditors control system
 Production related systems
7. Shared values
 What qualities or attributes do you base your actions on? What attributes defines the culture
of your business? What are the core values of your business? Examples of values include:
Timeliness
 Reliability
 Convenience
 Driving internal efficiency
 Effectiveness
 Efficiency
 People
 Customer satisfaction
 Customer intimacy
 Transparency
 Accountability
 Brand and business reputation
 Quality
 Innovation
 Creativity
SWOT ANALYSIS
 SWOT Analysis forms part of the strategic planning process
or strategic review of a business. It primarily involves
scanning the internal environment in light of identifying
and understanding the internal Strengths and Weaknesses
of a business.
 This is coupled with a scan of the external environment –
scanning the external environment enables a business to
identify and understand the opportunities and threats. It
is important to conduct a SWOT analysis for your business
plan.
 The SWOT analysis is a summary of the external and
internal environment analysis. You can also consider it to
be a corporate appraisal.
Strengths These are the internal strong points about your business –
they primarily include your core skills, competencies and
expertise. They reflect the capabilities of your business and
provide a good foundation for your business strategy.

Weaknesses This refers to internal factors that are lacking in your

business. Weaknesses need to be comprehensively assessed
in order to correct them or strategically turn them into
positive strengths.

Opportunities Opportunities are the likely benefits to your business

resulting from changes in the external environment.

Threats Threats pertain to the possible pitfalls or dangers resulting

from changes in the external environment. These are
likely to have an adverse or detrimental effect to your
business.
 In essence, the Strengths and Weaknesses are internal factors and the
Opportunities and Threats are external factors.

Conducting a SWOT analysis is beneficial for a start up or existing business as

it enables the entrepreneur to respond as follows:
 Basis Response

Strengths Capitalise or build on the

identified strengths

Weaknesses Turn weaknesses around

Opportunities Successfully assess and exploit

the opportunities

Threats Avoid the threats as you do not

have direct control over them
How do I go about drawing a SWOT
Analysis?
 Scan the Internal Environment
 This involves scanning the internal environment of your business in order to
deduce the Strengths and Weaknesses of your business. They following
schematic provides a guide for assessing the internal environment.
Internal environment considerations:
Skills What skills, competencies and expertise do you and your team
members have? Do you have financial skills? What about business
management skills? Do you have skills that are directly related to the
type of work your business renders? Where essential skills are lacking in
your team, mention these as weakness. Where essential skills are
present, note these as strengths.

Strategy Does your business have a clear strategy? Have you planned for the
long term, medium term and short term? Does your business have a
clear, well aligned vision and mission? What about strategic objectives?
Are action plans and targets present in your business? Do you have
performance indicators? Assess the scenario to deduce the strengths
and weaknesses in this regard.

Staff Does your business have the right staff? Does your business have the
right number and type of employees? Where the scenario is positive,
state these as strengths, otherwise mention these as weaknesses.
Structure Do you have an organisational structure? Is it formal or informal?
Does sit how clear lines of reporting, networking or
communicating? Is it the right structure for your business?
Discuss these considerations and allocate your findings under
strengths or weaknesses, whichever is appropriate.

Systems What systems do you have in place? Do you have Accounting

Systems? What about Monitoring and Control Systems? Where the
answer is yes then this is an internal strength. In instances where
important systems such as Quality Control Systems are lacking –
this must be noted as a weakness

Shared What values do you possess? Are these common to other

Values personnel in the business? Your values may include: creativity,
accountability, confidentiality, trustworthiness, honesty and many
more hallmarks. The key question is - are these values shared?
Are they the foundation and core of your business culture?
Essentially, in instances where the values are shared, this can be
noted as an internal strength; or as a weakness if the case is
otherwise.
External Environment Scanning
Perspective Considerations - Opportunity or Threat

Political Changes •Government policies

•Political climate

Economic Changes •The global recession

•Interest rates

•Inflation rates

Social •Crimed
Changes •Pollution
•The Aids pandemic and other diseases
•Unemployment
Social •Crime
Changes •Pollution
•The Aids pandemic and other diseases
•Unemployment

Technological Changes •New technologies

•Availability of technology
•The Internet

Legislative Changes •Labor related law

•Tax related law
•Employment related law

Environmental •Global warming

Changes •Recycling
•E-waste
•Deforestation
•Greening
Sample SWOT analysis
Strengths •The shared values of the team
•A strong well established brand name and brand loyalty
•Excellent reputation and positioning in the market
•Good competitive advantages
•Good location of the business
•Creditworthiness of the owners of the business
•Skilled, competent and experienced personnel
•Accreditations with significant bodies
•Financial and accounting systems in place
•Monitoring and evaluation systems in place

Weaknesses •Lack of quality control systems

•Lack of advanced financial management skills
•Lack of a formal structure
•Slight gap in capabilities
Opportunities •Availability of advanced technology
•Developments in Information Technology
•Great Market demand
•Growing export market
•Growing industry
•Favorable Government policies
•Positive seasonal influences
•Increased consumer spending

Threats •Direct competitors

•Indirect competitors
•Threat from consumers
•Threat from substitute products or services
•Threat from suppliers
•Rivalry
THINGS TO FONDER
 Outside-in analysis considers the external environment,
including the general environment and the industry
environment.
 The major segments of the general environment are the
macroeconomic, sociocultural, political/legal,
technological, and global segments.
 The major forces that determine the level of competition
within the industry environment are the threat of new
competitors, the threat of substitute products or services,
the intensity of rivalry among existing competitors, the
bargaining power of suppliers, and the bargaining power of
buyers.
 Opportunities arise for small businesses that are alert to
changes in the general and industry environments.
 Inside-out analysis helps the entrepreneur to understand
the internal potentials of the business.
 Tangible resources are visible and easy to measure;
intangible resources are invisible and difficult to quantify.
 Capabilities represent the integration of several resources
in a way that boosts the firm’s competitive advantage.
 Core competencies are those resources and capabilities
that can be leveraged to enable a firm to do something
that its rivals cannot do.
 A SWOT analysis provides an overview of a firm’s
strengths and weaknesses, as well as opportunities for
and threats to the organization.
ENTREPRENEURIAL
STRATEGY
IDENTIFYING ENTREPRENEURIAL OPPORTUNITIES
INTRODUCTION
 Fundamentally, all business organizations exist to provide
a service or product to their customers at a price which
can give profit to the entrepreneurs and provide value to
the customers. Therefore, most business opportunities
evolve and develop from an effort to fill a gap in the form
of needs, wants and creation of value to the customers.
Scanning the Environment

 Improvement of existing products or introduction of better

quality new products.
 Fulfilling the gaps of needs, wants and creation of value to
customers.
 Opportunities based on local market or business advantage such
as supply and demand, competition, cost advantage, quality
advantage, reputation and brand advantage, etc.
 Opportunities based on macro factors such as
 technology
 demographic, geographic and psychographic factors
 political
 trend, etc.
Business Ideas
The following are examples of possible sources of business ideas:
 Based on work experience.
 Based on hobby and interest.
 Based on chance encounters or observations while travelling.
 Based on family business.
 Based on suggestion from spouse, siblings and friends.
 Based on business networks.
 Based on local needs, wants, problem or finding gaps in the
market place.
 Based on market trend or market growth potential.
 Based on copying successful business model.
Business Ideas (cont.)
 Based on franchise business.
 Based on searching and seeking of good opportunities in
the environment.
 Based on experimentation, trial and error methods and
better product development.
 Based on building internal strengths such as skills,
capability, experiences, resources and networks so that
you become the best and most suitable person to capture
the opportunity. These additional strengths that you build
may make opportunities seek you or single you out from
your competitors.
 Based on readings from magazines, books and internet.
 Looking for good existing business for sale.
Screening, Analysis and Selection of the
Opportunities
 By nature, business environment is always like a competitive
game, only the best will win the competition.
− In order to win the game, an entrepreneur must choose a
sector that suits his interest, aspiration, strength,
capabilities and resources and find a market opportunity
that offers him attractive and positive factors such as a
sizable market, high growth market and minimum
competition.
 He needs to identify a business that he enjoys doing and has
the skills to produce high quality product and can make this
product at a cheaper cost and thus, can sell at an attractive
price and in the process, makes some profit and contributes
better value to the customers.
Critical Success Factors of an
Entrepreneur
 Entrepreneurial characteristic and traits such as being
hardworking, alert to opportunities, perseverance, willing
to take calculated risks, tolerance for ambiguity, high
need for achievement, internal locus of control, goal
oriented, etc.
 Knowledge and experience in the field.
 Soft skills such as leadership, communication and
negotiation skills
Critical Success Factors of an
Entrepreneur (cont.)
 Adequate resources such as capital and human resource.
 Good networking with potential customers, suppliers,
experts, potential workers, bankers and investors.
 Good viable business opportunities with many positive and
attractive environmental factors such as market size,
market growth, minimum or tolerable competition, good
support system and a good business concept, strategy,
sound business plan and meticulous execution details
Adequacy Threshold
Strategic Planning For Small Business

Strength, Weakness, Opportunities and Threat (SWOT)

Analysis
 Using the SWOT analysis, an entrepreneur can identify
attractive and favourable business opportunities that
match his/her strengths.
Selection of Business Opportunities
Business Model
Business Identification
ENTREPRENEURIAL
STRATEGY
SELECTING STRATEGIES THAT CAPTURE OPPORTUNITIES
Competitive Strategy
 A competitive strategy consists of moves to
 Attract customers
 Withstand competitive pressures
 Strengthen an organization’s market position
 The objective of a competitive strategy is to generate a competitive
advantage, increase the loyalty of customers and beat competitors
 A competitive strategy is narrower in scope than a business strategy
 Five competitive strategies are
 Overall low-cost leadership strategy
 Best cost provider strategy
 Broad differentiation strategy
 Focused low-cost strategy
 Focused differentiation strategy
Overall Low-Cost Leadership Strategy
 Strive to be the overall low-cost provider in an industry
 How to achieve overall low-cost leadership
 Scrutinize each cost activity
 Manage each cost lower year after year
 Reengineer cost activities to reduce overall costs
 Cut some cost activities out of the value chain
 Competitive strengths of a overall low-cost strategy
 Organization in a better position to compete offensively on price
 Organization is better able to negotiate with large customers
 Organization is able to use price as a defense against substitutes
 Low cost is a significant barrier to entry
 Organization is more insulated from the power of suppliers
When Does an Overall Low-Cost Strategy
Work the Best
 When price competition is a dominant competitive force
 The product is a “commodity”
 There are few ways to differentiate the product
 Most customers have similar needs/requirements
 Customers incur low switching costs changing sellers
 Customers are large and have significant bargaining power
When Doesn’t a Overall Low-Cost
Strategy Work
 When technological breakthroughs open cost reductions
for competitors, negating a low-cost provider’s efficiency
advantage
 Competitors find it relatively easy and inexpensive to
imitate the leader’s low cost methods
 Low-cost leader focuses so much on cost reduction that
the organization fails to respond to
 Changes in customer requirements for quality and service
 New product developments
 Reduced customer sensitivity to price
Broad Differentiation Strategies
 Striving to build customer loyalty by differentiating an
organization’s products from competitors’ products
 Keys to success include
 Finding ways to differentiate to create value for customers that
are not easily copied
 Not spending more to differentiate than the price premium that
can be charged
 A successful differential strategy allows an organization to
 Set a premium price
 Increase unit sales
 Build brand loyalty
Broad Differentiation Strategies
 Where to look for differentiation opportunities
 Supply chain
 Research and development
 Production activities
 Marketing, sales and service activities
 Strengths of a Differentiation Strategy
 Customers develop loyalty to the brand
 Brand loyalty acts as an entry barrier
 Organization is better able to fend off threats of substitute products
because of brand loyalty
 Reduces bargaining power of large customers since other brands are less
attractive
 Seller may be in a better position to resist efforts of suppliers to raise
prices
Pitfalls of a Broad Differentiation
Strategy
 Trying to differentiate on an unimportant product feature
that doesn’t result in providing more value to the
customer
 Over differentiating the product such that the product
features exceed the customers’ needs
 Charging a price premium that buyers perceive as too high
 Ignoring need to signal value
 Not identifying what customers consider valuable
Best-Cost Provider Strategy
 Striving to give customers more value for the money by
combining an emphasis on low cost with an emphasis on
upscale differentiation
 Combines low-cost and differentiation
 The objective is to create superior value by meeting or
beating customer expectation on product attributes and
beating their price expectations
 Keys to success
 Match close competitors on key product attributes and beat them
on cost
 Expertise at incorporating upscale product attributes at a lower
cost than competitors
 Contain costs by providing customers a better product
Advantages of Best-Cost Provider
Strategy
 Competitive advantage comes from matching close
competitors on key product attributes and beating them
on price
 Most successful best-cost providers have skills to
simultaneously manage costs down and product quality up
 Best-cost provider can often beat an overall low-cost
strategy and a broad differentiation strategy where
 Customer diversity makes product differentiation the norm
 Many customers are price and value sensitive
Focus Strategies
 Focus strategy based on low-cost
 Concentrate on a narrow customer segment beating the
competition on lower cost
 Focus strategy based on differentiation
 Offering niche customers a product customized to their needs
 Overall objective of both focus strategies is to do a better
job of serving a niche target market than competitors
 Keys to success
 Choose a niche were customers have a distinctive preference,
unique needs or special requirements
 Develop a unique ability to serve the needs of a niche target
market
What Makes a Niche Attractive?
 Large enough to be profitable
 Good growth potential
 Not critical to the success of major competitors
 Organization has the resources to effectively serve the
niche
 Organization can defend itself against challengers through
a superior ability to serve the niche
 No competitors are focusing on the niche
Strengths and Risks of Focus Strategies
 Strengths
 Competitors don’t have the motivation to meet specialized needs of
the niche
 Organization’s competitive advantage could be seen as a barrier to
entry
 Organization’s competitive advantage provides an obstacle for
substitutes
 Organization’s ability to meet the needs of customers in the niche can
reduce the bargaining power of large niche buyers
 Risks
 Broad differentiated competitors may find effective ways to enter the
niche
 Niche customers’ preferences may move toward the product
attributes desired by a larger market segment
 Profitability may be limited if too many competitors enter the niche
Strategy Options and Focus Strategies
 A competitive advantage can be created using broad-
based strategy options—cost-based or differentiation-
based strategies.
 A cost-based strategy requires the firm to become the
lowest-cost producer within the market.
 Product differentiation is frequently used as a means of
achieving superior performance.
 Focusing on a specific market segment is a strategy that
small firms often use successfully.
Strategy Options and Focus Strategies
(cont’d.)
 A focus strategy may involve restricting focus to a single
subset of customers, emphasizing a single product or
service, limiting the market to a single geographical
region, or concentrating on product/service superiority.
 The basic direction of the business is chosen when the
entrepreneur makes a strategic decision and selects a
particular focus strategy.