UNIT-I

BUSINESS ENVIRONMENT
The term business refers to an organization or enterprising entity engaged in commercial,
industrial, or professional activities. The purpose of a business is to organize some sort of
economic production (of goods or services). Businesses can be for-profit entities or non-
profit organizations fulfilling a charitable mission or furthering a social cause. Businesses range
in scale and scope from sole proprietorships to large, international corporations.

Business also refers to the efforts and activities undertaken by individuals to produce and sell
goods and services for profit.

A business is defined as an organization or enterprising entity engaged in commercial,

industrial, or professional activities.

Businesses can be for-profit entities or non-profit organizations.

Business types range from limited liability companies to sole proprietorships, corporations, and
partnerships.

Some businesses run as small operations in a single industry while others are large operations
that spread across many industries around the world.

Apple and Walmart are two examples of well-known, successful businesses.

Understanding Business
The term business often refers to an entity that operates for commercial, industrial, or
professional reasons. The concept begins with an idea and a name, and extensive market
research may be required to determine how feasible it is to turn the idea into a business.

Business Environment: Meaning, Characteristics and Importance

The term “Business environment” represents the sum of all the individuals, institutions,
competing organisations, government, courts, media, investors, and other factors outside the
power of the business organisations but affects the business performance. Hence, changes in
government economic policies, rapid changes in technology, changes in consumer tastes and
preferences, increasing market competition, etc. are outside the business organisations' power
but affect the business performance immensely.

For example, an increase in taxes by the government makes everything expensive in the
market; technology changes may make the existing product obsolete, political uncertainty
creates fear in the mind of investors, increase in competition in the market due to competitors
may affect business profit, and changing in demand and preferences may increase the need for
a new product and decrease the demand for old product.

A business environment includes all external factors and forces which have a certain degree of
impact on the business actions, decisions, and strategies of the firm. Usually, the success of a
business is dependent on its environment. Businesses are expected to identify, appraise, and
respond to all threats and opportunities in their environments.

Characteristic
Complex
A business environment has a plethora of factors, events, conditions, and influences arising
from a variety of sources. Therefore, it is very difficult to understand all the factors affecting a
given environment at any time. Although we can understand it in parts, it is impossible to grasp
it in totality.

Dynamic
Like the natural environment, a business environment also keeps changing constantly. This is
due to a wide range of influencing factors. These factors create dynamism in the environment
causing it to continuously change its shape and character.

Multi-faceted
Due to the complexity and dynamism of a business environment, it continuously changes its
shape and character. However, different observers view the changes differently. Therefore, a
particular observer might see a specific change in the environment as an opportunity while
someone else might perceive it as a threat.

For example, Plasma TVs and LCD’s gave way to LEDs. Some manufacturers saw it as an
opportunity and started producing LEDs instead of LCDs or Plasmas. Now, LEDs are giving way
to 3D TVs. Depending on the perception of the firm, it might see it as an opportunity to create
new products or as a threat to its current sales.

Far-reaching impact
A business environment has a far-reaching impact on the organization. Businesses who realize
the impact of the environment on their growth and profitability ensure that they adapt
constantly to be in sync with it.

Importance
Improves performance

By studying a business environment, you can help an organization improve its performance.
You can develop strategies to adapt to changes in the environment. For example, if a positive
development happens, you can identify ways to maximize the opportunities the change
creates. Alternatively, if a challenge occurs, you can identify it early and determine a strategy to
minimize its impact on an organization. The ability to react quickly to the changing conditions of
a business environment can help a company grow and improve, supporting its overall
performance.

Increases organization

A large component of a business environment includes planning for the future. When an
external force shifts, you can create a strategic plan to address this changing condition. By
maintaining a business environment, you can help a business increase its organization. For
instance, your team might develop action plans for future changes within the business
environment, such as expanding the company or developing a new product. This type of
planning can help you lead your team to be better prepared to handle new plans, orders or
tasks.

Determines business opportunities

When you analyze the business environment, you may identify opportunities for business
growth. A business environment is dynamic, meaning it's constantly changing. Business
managers and analysts who regularly study the company's business environment can
implement action plans to create new opportunities. For instance, you might recognize a gap in
the market and use that knowledge to create a new product that resolves the issue. Often,
these changes may result in increased profits or improved operations for an organization.

Identifies threats

There can be many threats when managing a business. If you understand the business
environment, you can predict and analyze those risks. Examples of threats may include new
competitors or the loss of profits. When you study the business environment, you can identify
those threats before they escalate. For instance, you might work with the marketing team to
observe their competitor's trends and actions. This research can help the team identify ways to
solve problems or compete effectively with other organizations.

Forms of Business Organizations

The five forms of business organizations include the following:

• Partnership
• Corporation
 • Sole proprietorship
• Cooperative
• Limited liability company

1. Partnership

You can classify a business partnership as either general or limited. General partnerships allow
both partners to invest in a business with 100% responsibility for any business debts. They don't
require a formal agreement. In comparison, limited partnerships require owners to file
paperwork with the state and compose formal agreements that describe all of the important
details of the partnership, such as who is responsible for certain debts.

Some advantages of partnerships include:

• Easy to establish: Compared to other business structures, partnerships require minimal

paperwork and legal documents to establish.
• Partners can combine expertise: With more than one like-minded individual, there are
more opportunities to increase their collaborative skillset.
• Distributed workload: People in partnerships commonly share responsibilities so that
one person doesn't have to do all the work.

Disadvantages to consider:

• Possibility for disagreements: By having more than one person involved in business
decisions, partners may disagree on some aspects of the operation.
• Difficulty in transferring ownership: Without a formal agreement that explicitly states
processes, a business may come to a halt if partners disagree and choose to end their
partnership.
• Full liability: In a partnership, all members are personally liable for business-related
debts and may be pursued in a lawsuit.

An example of a partnership is a business set up between two or more family members, friends
or colleagues in an industry that supports their skill sets. The partners of a business typically
divide the profits among themselves.

2. Corporation

A corporation is a business organization that acts as a unique and separate entity from its
shareholders. A corporation pays its own taxes before distributing profits or dividends to
shareholders. There are three main forms of corporations: a C corporation, an S corporation
and an LLC, or limited liability corporation.

Advantages of corporations include:

 • Owners aren't responsible for business debts: In general, the shareholders of a
corporation are not liable for its debts. Instead, shareholders risk their equity.
• Tax exemptions: Corporations can deduct expenses related to company benefits,
including health insurance premiums, wages, taxes, travel, equipment and more.
• Quick capital through stocks: To raise additional funds for the business, shareholders
may sell shares in the corporation.

Disadvantages include:

• Double taxation for C-corporations: The corporation must pay income tax at the
corporate rate before profits transfer to the shareholders, who must then pay taxes on
an individual level.
• Annual record-keeping requirements: With the exception of an S-corporation, the
corporate business structure involves a substantial amount of paperwork.
• Owners are less involved than managers: When there are several investors with no
clear majority interest, the management team may direct business operations rather
than the owners.

Common examples of corporations include a business organization that possesses a board of

directors and a large company that employs hundreds of people. About half of all corporations
have at least 500 employees.

3. Sole proprietorship

This popular form of business structure is the easiest to set up. Sole proprietorships have one
owner who makes all of the business decisions, and there is no distinction between the
business and the owner.

Advantages of a sole proprietorship include:

• Total control of the business: As the sole owner of your business, you have full control
of business decisions and spending habits.
• No public disclosure required: Sole proprietorships are not required to file annual
reports or other financial statements with the state or federal government.
• Easy tax reporting: Owners don't need to file any special tax forms with the IRS other
than the Schedule C (Profit or Loss from Business) form.
• Low start-up costs: While you may need to register your business and obtain a business
occupancy permit in some places, the costs of maintaining a sole proprietorship are
much less than other business structures.

Disadvantages include:

• Unlimited liability: You are personally responsible for all business debts and company
actions under this business structure.
 • Lack of structure: Since you are not required to keep financial statements, there is a risk
of becoming too relaxed when managing your money.
• Difficulty in raising funds: Investors typically favor corporations when lending money
because they know that those businesses have strong financial records and other forms
of security.

Some typical examples of sole proprietorships include the personal businesses of freelancers,
artists, consultants and other self-employed business owners who operate on a solo basis.

4. Cooperative

A cooperative, or a co-op, is a private business, organization or farm that a group of individuals

owns and runs to meet a common goal. These owners work together to operate the business,
and they share the profits and other benefits. Most of the time, the members or part-owners of
the cooperative also work for the business and use its services.

Advantages of a cooperative include:

• Greater funding options: Cooperatives have access to government-sponsored grant

programs, like the USDA Rural Development program, depending on the type of
cooperative.
• Democratic structure: Members of a cooperative follow the "one member, one vote"
philosophy, meaning that everyone has a say, regardless of their investment in the co-
op.
• Less disruption: Cooperatives allow members to join and leave the business without
disrupting its structure or dissolving it.

Disadvantages include:

• Raising capital: Larger investors may choose to invest in other business structures that
allow them to earn a larger share, as the cooperative structure treats all investors the
same, both large and small.
• Lack of accountability: Cooperatives are more relaxed in terms of structure, so
members who don't fully participate or contribute to the business leave others at a
disadvantage and risk turning other members away.

Many cooperatives exist in the retail, service, production and housing industries. Examples of
businesses operating as cooperatives include credit unions, utility cooperatives, housing
cooperatives and retail stores that sell food and agricultural products.

5. Limited liability company

The most common form of business structure for small businesses is a limited liability company,
or LLC, which is defined as a separate legal entity and may have an unlimited amount of
owners. They are typically taxed as a sole proprietorship and require insurance in case of a
lawsuit. This form of business is a hybrid of other forms because it has some characteristics of a
corporation as well as a partnership, so its structure is more flexible.

Some advantages of an LLC include:

• Limited liability: As the name states, owners and managers have limited personal
liability for business debts, whereas individuals assume full responsibility in a sole
proprietorship or partnership.
• Pass-through taxation: Owners of LLCs may take advantage of "pass-through" taxation,
which allows them to avoid LLC and corporation taxes, and owners pay personal taxes
on business profits.
• Flexible management: LLCs lack a formal business structure, meaning that their owners
are free to make choices regarding the operation of their businesses.

Some disadvantages include:

• Associated costs: The start-up costs associated with an LLC are more expensive than
setting up a sole proprietorship or partnership, and there are annual fees involved as
well.
• Separate records: Owners of LLCs must take care to keep their personal and business
expenses separate, including any company records, whereas sole proprietorships are
less formal.
• Taxes: In regards to unemployment compensation, owners may have to pay it
themselves.

Common examples of limited liability companies include start-ups and other small businesses.
Family-owned businesses and companies with a small number of members may operate as an
LLC because it is a flexible business model that allows members to be active or passive in their
roles.

SWOT analysis
SWOT analysis is a framework for identifying and analyzing an organization's strengths,
weaknesses, opportunities and threats. These words make up the SWOT acronym.

The primary goal of SWOT analysis is to increase awareness of the factors that go into making a
business decision or establishing a business strategy. To do this, SWOT analyzes the internal
and external environment and the factors that can impact the viability of a decision.
Businesses commonly use SWOT analysis, but it is also used by nonprofit organizations and, to a
lesser degree, individuals for personal assessment. SWOT is also used to assess initiatives,
products or projects. As an example, CIOs could use SWOT to help create a strategic business
planning template or perform a competitive analysis.

The SWOT framework is credited to Albert Humphrey, who tested the approach in the 1960s
and 1970s at the Stanford Research Institute. SWOT analysis was originally developed for
business and based on data from Fortune 500 companies. It has been adopted by organizations
of all types as a brainstorming aid to making business decisions.

When and why should you do a SWOT analysis?

SWOT analysis is often used either at the start of, or as part of, a strategic planning process. The
framework is considered a powerful support for decision-making because it enables an
organization to uncover opportunities for success that were previously unarticulated. It also
highlights threats before they become overly burdensome.

SWOT analysis can identify a market niche in which a business has a competitive advantage. It
can also help individuals plot a career path that maximizes their strengths and alert them to
threats that could thwart success.

This type of analysis is most effective when it's used to pragmatically recognize and include
business issues and concerns. Consequently, SWOT often involves a diverse cross-functional
team capable of sharing thoughts and ideas freely. The most effective teams would use actual
experiences and data -- such as revenue or cost figures -- to build the SWOT analysis.

Elements of a SWOT analysis

As its name states, a SWOT analysis examines four elements:

• Internal attributes and resources that support a successful outcome, such as a diverse
product line, loyal customers or strong customer service.

• Internal factors and resources that make success more difficult to attain, such as a weak
brand, excessive debt or inadequate staffing or training.
• External factors that the organization can capitalize on or take advantage of, such as
favorable export tariffs, tax incentives or new enabling technologies.

• External factors that could jeopardize the entity's success, such as increasing competition,
weakening demand or an uncertain supply chain.

A SWOT matrix is often used to organize the items identified under each of these four
elements. The matrix is usually a square divided into four quadrants, with each quadrant
representing one of the specific elements. Decision-makers identify and list specific strengths in
the first quadrant, weaknesses in the next, then opportunities and, lastly, threats.

Organizations or individuals doing a SWOT analysis can opt to use various SWOT analysis
templates. These templates are generally variations of the standard four-quadrant SWOT
matrix.

How to do a SWOT analysis

A SWOT analysis generally requires decision-makers to first specify the objective they hope to
achieve for the business, organization, initiative or individual. From there, the decision-makers
list the strengths and weaknesses as well as opportunities and threats.

Various tools exist to guide the decision-making process. They frequently provide questions
that fall under each of the four SWOT elements.

For example, participants might be asked the following to identify their company's strengths:
"What do you do better than anyone else?" and "what advantages do you have?" To identify
weaknesses, they may be asked "where do you need improvement?" Similarly, they'd run
through questions such as "what market trends could increase sales?" and "where do your
competitors have market share advantages?" to identify opportunities and threats.

Example of a SWOT analysis

The end result of a SWOT analysis should be a chart or list of a subject's characteristics. The
following is an example of a SWOT analysis of an imaginary retail employee:
• Strengths: good communication skills, on time for shifts, handles customers well, gets along
well with all departments, physical strength, good availability.

• Weaknesses: takes long smoke breaks, has low technical skill, very prone to spending time
chatting.

• Opportunities: storefront worker, greeting customers and assisting them to find products,
helping keep customers satisfied, assisting customers post-purchase and ensuring buying
confidence, stocking shelves.

• Threats: occasionally missing time during peak business due to breaks, sometimes too
much time spent per customer post-sale, too much time in interdepartmental chat.

Types of Business Environment

The types of business environment are:

1. Internal Environment
2. External Environment

1. External Environment
External business environments are all the elements outside the company’s control. These
factors that affect an organization are also uncontrollable, such as socio-cultural and economic
factors, demographic and technological aspects, legal issues, and other factors.

External influences are beyond the control of businesses. Thus, a company’s success heavily
depends on its ability to effectively adjust and design the internal variables. It allows the
company to take advantage of opportunities and overcome challenges in the business
surroundings. However, every business has two kinds of environments, i.e., the external
environment and the internal environment.

The external environment consists of two essential components:

A. Micro Environment
B. Macro Environment

A. Micro Environment
A micro business environment is a term used to describe the elements that directly impact the
efficiency of the business. It means that they represent the immediate environment that a
company affects. The microelements comprise suppliers, competitors, marketers,
intermediaries in marketing consumers, suppliers, and the general public—macro factors of the
business world influence these variables.

The micro environmental aspects are more closely in connection with the business in contrast
to macro factors. The micro environmental factors affect various industries in various ways. So,
a company can employ the micro-factors used for a specific business. For instance, the
microenvironment of a restaurant could be its patrons, other restaurants, and suppliers of raw
materials and human resources, for example.

The success or demise of a business depends on how it handles the micro-elements that make
up:

i) Customers

The most vital element of a business external environment. The primary goal for any company
is to retain and attract its customers. It will help the company achieve long-term survival and
financial success. To increase customer loyalty, companies must be attentive to the
requirements and desires of their customers and meet these needs efficiently. Businesses must
examine customers’ evolving preferences and tastes and adapt their products and services to
these changes. Every company should know the client’s interest, as it could negatively impact
the business environment.
ii) Suppliers

They supply raw materials, parts, and equipment to business companies. Suppliers are a crucial
micro-factor in the business external environment context. They need to be reliable and
friendly with businesses. It will assist the company in meeting customers’ expectations, and
businesses will be free to carry the responsibility of storing large stocks.

iii) Marketing Intermediaries

These are the ones who act as mediators between the producer and the customer. The number
of intermediaries in marketing differs based on the size and nature of the distribution system.
Marketing intermediaries benefit the company only when they can coordinate between
channels without obstacles, as these are the external environment components.

iv) Competitors

Organizations that produce similar products and attempt to take over market share are called
competitors. The business needs to be aware of what competitors are doing and develop a
future strategy to increase profits and remain in the market. It allows the company to stay
ahead of its competitors over the long term.

V) The General Public

The public is also an integral aspect of the business external environment climate. The people’s
opinions and reactions directly affect a company’s image. It can also impact the revenue and
sales of the business. Activities like polluting the air, noise, the absence of waste disposal, and
so on. could negatively impact the company’s image.

B. Macro Environment
The macro environment is prevalent outside of the business. The company must implement
numerous production, marketing, and management changes based on macroeconomic factors.

The macro-environmental factors that are most significant are in the following order:

i) Politics

Factors like the state political institutions, government, legislation, and private and public
stakeholders’ policies impact the business climate and the external environment. The
company’s stability and success depend on the political environment in which it operates.
Sometimes, the changes done by the government’s policies (e.g., tax policies, government
contracts, etc.), as well as regulations (e.g., safety regulations) and regulations (e.g., safety
regulations), affect the smooth operation and efficiency of the company.

ii) Economic Environment

The conditions of a nation’s economy can affect an organization’s business plans and decisions.
Factors like the economic growth rate, unemployment rate, foreign exchange rates, and
inflation and deflation rates can cause or contribute to problems when managing your business.
It affects the external environment related to the business.

iii) Social Environment

The social environment is the norms and beliefs of society. Businesses are in influence by
factors like the evolving preferences and tastes of the customers as well as the standard of
living and the level of education. For instance, the advertisement phrase “Come to life” was
employed by Pepsi Cola Company to promote its product. Pepsi-Cola Company to promote its
development. The message has misunderstood by the people living in a specific area. They saw
“Come Live” as “Coming out of Graves.” In the end, there was no demand for the product in
that area. The company, therefore, changed its name because it was impossible to thrive in the
market without recognizing societal norms and the external environment.

iv) Technology Environment

It’s the evolution of the operation of a business, such as the making use of new equipment,
advanced technologies and improved production methods, and so on. The company must
monitor these modifications to stay competitive in the market—technology advances to aid the
business in offering standard and high-quality products to customers.

v) Physical Environment

In the short-term and long-term, the concerns of environmental impacts are vital to the
business. External environmental changes such as natural catastrophes could affect general
business operations, such as supply and production, destruction of assets owned by the
company, etc. The methods for assessing risk to the environment to deal with such scenarios
are in use by companies.

vi) Legal Environment

Every business transaction must govern specific laws and regulations. The business cannot
afford to ignore legal issues, affecting how it conducts business. An appropriate legal
framework is vital for any business. Some of the most important laws that impact businesses
are the Essential Commodity Act, Weights and Measures Act, Trade Mark Act, and others.
vii) Demographic Environment

Demographic changes majorly impact business decision-making. The demographics vary from
one location to another. The external environment changes could be in the population size or
age, ethnicity composition, income levels, etc. Before determining a plan for the future and
present business, it is essential to consider these factors related to demographics.

viii) The Global Environmental

The global business environment comprises a variety of political and legal structures. Also,
economic policies, standardization of accounting, standards for environmental protection, and
labour policies includes in it. These deal with cultural and language differences, trade and
import regulations, foreign exchange policy, tariffs, trade agreements, etc. Each of these
elements could have significant differences between countries. The goals of a company and
methods of achieving these goals are the main determinants of its activities in an international
environment of business.

2. Internal Environment
An environment that directly affects the business is the internal environment. The external
factors that influence the business’s climate can control. Thus, factors like physical facilities and
organizational and functional tools can be modified and revised according to the demands of
the business environment. The following internal elements determine the strategies and
choices of the internal organization:

A. Value System
The choice of a business’s mission, vision, and goals, as well as business policies and
procedures, are all part of the system of value of a company. The internal environment consists
of a company’s founding, and the management team is vital in making decisions for the values
system.

B. Mission, Vision and Objectives

Vision is a broader vision of the company’s internal environment’s future possibilities. Vision
assists in meeting the business’s goals. The mission is a short-term process.

C. The Management Structure and the Nature

In general, the organization’s structure influences the business decision-making process. This
structure comprises directors on a board, managers, executives, and so on. The number of
people in a network defines the time of the decision-making process.
D. Internal Power Relations
The coordination of the different levels of organizational structure is crucial. Three levels, i.e.,
the top, middle and lowest, must have a typical relationship. It allows the company to run
efficiently.

E. Human Resources
Human resources are the main element of any company’s internal environment. They
determine the strengths and weaknesses of an organisation. The fundamental requirements for
human resources are the ability to perform, quality dedication and sincerity, positive behavior,
etc.

F. Brand Image and Equity

An enterprise’s internal environment influences the image it projects to the outside market.
The idea of an organization aids in raising capital, mergers and other alliances, etc. In the same
way, brand equity affects the company.

G. Other Factors

Many other variables affect how successful or unsuccessful an enterprise is in the following
order:

i) Physical Facilities and Assets

These internal environment factors are crucial to the company’s efficiency. Facilities that affect
the company’s competitiveness are production, technology, and labour, among others.

ii) Research and Development

The ability to invent and be competitive is in explanation through the R&D department within
an organisation. But it’s an external element. It also affects the corporate environment.

iii) Marketing Resources

The marketing effectiveness of an organisation directly influences the resources like the
marketing department of the business and the marketing team, distribution channel, and brand
equity.
 iv) Financial Factors

The financial aspect is the lifeblood of an organisation. Proper distribution of economic

resources impacts business performance, as well as strategies and policies for business. The
most significant factors influencing the external environment include financial policies and
capital investment.

Porter's Five Forces

Porter's Five Forces model is a strategic framework that helps to identify and
analyze five forces that affect company’s profitability in any given industry. These
five forces are:

1. Threat of new entrants

2. Bargaining power of suppliers
3. Bargaining power of buyers (customers)
4. Threat of substitutes
5. Competitive rivalry
Threat of New Entrants
When an industry starts becoming profitable, it will entice new entrants. If the barriers to entry
are low, new entrants can easily capture market share and threaten profitability.

New entrants undercut prices and offer valuable alternatives to what your industry currently
provides.

A practical example of a new entry and high threat to existing players is Apple’s entrance into
the music distribution industry with the iPod. They entered into a new market, stole market
share from existing players, and completely changed the way we consume music and audio
content today.

Bargaining Power of Suppliers

Suppliers offer your industry the needed inputs to operate (e.g. components, materials, and
services). When the bargaining power of suppliers is high, there’s a strong chance your
suppliers could raise prices or reduce quality without retaliation.

If you have a number of suppliers to choose from, their bargaining power is likely low, so you
will not have a problem switching suppliers if needed.

Bargaining Power of Buyers

In Porter's 5 Forces model, buyers are your customers. At the expense of industry profitability,
strong buyer power can lower prices, pit rivals against each other, and demand higher quality
or service.

Buyers have power when they are few in number and have many sellers to choose from.
Beyond this, if a large portion of a seller’s revenue is determined by a handful of buyers, those
buyers will have more leverage.
Threat of Substitute Products or Services
All firms in an industry are competing with other industries that make substitute products or
services. An example is a messaging app that is a substitute for e-mail. Or an airline website
replacing travel agents with its own ticket booking system.

If buyers can satisfy their needs with a different product or service from an alternative industry,
that will put a lid on how high your industry can set its price.

The more attractive a substitute, the firmer the lid on industry profits. If there are many
substitutes that can perform a similar function as your product or service, then the threat of
substitutes is high.

Competitive Rivalry
Although rivals are subject to the same industry forces as yourself, the force of competitive
rivalry is often the largest determinant of an attractive industry since it is affected by the four
previous forces. In order to capture their share of the market, rivals will compete on price,
quality, service, marketing spends, etc.

Competitive intensity is the highest when your buyers have plenty of alternatives, there is little
differentiation between rivals, and when industry growth is slowing. If the buyer can choose
from multiple rivals, the buyer can start bidding wars and reduce profits.

When there is little differentiation between rivals, your product or service will be perceived as a
commodity and the buyer will purchase solely on price.

What Is a Competitive Strategy?

A competitive strategy is a set of policies and procedures that a business uses to gain a
competitive advantage in the market. It's the process of identifying and executing actions that
allow a business to improve its competitive position. Businesses may use various competitive
strategies to raise the value of their products and services for consumers, investors and
employees. They also implement these strategies to gain sustainable revenue streams.

Importance

Competitive strategy is important because it affects the overall strategies of a business. If a

business doesn't have a competitive strategy, it may not find a unique advantage against its
competitors. A competitive strategy is crucial in finding and developing new ideas for products
and services that the company can offer. Other advantages of implementing a competitive
strategy include:

• The exploration of new opportunities

• The retainment of customer loyalty with better products and services
• Innovation to stay current on technological changes in the market.

4 types of competitive strategy

Here are four types of competitive strategy and an example for each:

1. Cost leadership strategy

A cost leadership strategy keeps prices for products and services lower than competitors to
encourage customers to purchase the lower-priced products to save money. Businesses use a
cost leadership strategy in industries with high price elasticity, such as energy and
transportation. This strategy is most effective for companies that can produce a large volume of
products for low costs. These businesses often have large-scale production methods, high-
capacity utilization and various distribution channels with which to work.

2. Differentiation leadership strategy

Businesses may use the differentiation leadership strategy to differentiate their products from
competitors by emphasizing specific features of their products. This strategy might involve the
design or function of a product. A company that's been in operation for a while may use this
strategy to show that an original offering is better than newer products. Alternatively, a newer
company may use this strategy to show that a new invention is more beneficial than existing
offerings. The goal is to appeal to more customers through unique features and quality while
keeping competitors from obtaining a larger market share for products.
3. Cost focus strategy

The cost focus strategy is similar to the cost leadership strategy, but the cost focus strategy
involves catering to a specific market. This strategy still involves trying to offer the lowest price,
but it attempts to target a unique market segment with specific preferences and needs. When a
company implements a cost focus strategy, it can establish brand awareness more easily within
a specific geographic market.

4. Differentiation focus strategy

The differentiation focus strategy is similar to the differentiation leadership strategy in that
both attempt to highlight unique product attributes and features. The difference between them
is that while the differentiation leadership strategy may involve appealing to a broader market,
the differentiation focus strategy involves appealing to a specific market segment. This strategy
typically doesn't prioritize the price of a company's offerings, as it attempts to highlight how a
company's offerings are unique compared to those of its competitors.