The Importance of Assessing Your Business Strategy

The phrase ‘business strategy’ is commonly used for a reason – your strategy right now can have ramifications years down the line. Strategy is making a series of intentional choices. In business, the decisions you make early on can ‘fix’ you on a particular trajectory for a very long time – as will become clear in the coming blogs.

How you position your business within your industry should be an overarching theme of your whole business strategy. Without this clarity, businesses can very quickly succumb to competitors or simply lose their appeal to consumers through a phenomenon in business known as ‘straddling’.

Generally, positioning within an industry is at either end of two sides; low cost (such as Kmart) or differentiated (such as Mercedes) in which products are at a premium price because of their perceived quality in particular areas. Apple is another example of a differentiated player; a high premium price at high quality; known in particular for having a very good security systems against viruses. Dell computers on the other hand operates at the low cost end; lower prices for reliable computers. Remember Toshiba laptops? They are no longer produced…so what happened? After producing the first personal computer in 1985, and reaching nearly 18 million sales in one year at it’s peak, in 2020 it was announced Toshiba will no longer be in the computer business. Their laptops sales were not making profit; they never fully positioned as high quality (in a particular area) at a premium price – they weren’t fully differentiated from the rest. They ended up straddling; they weren’t differentiated premium nor were they low cost.

The strategy then for any business is in understanding your competitive environment and then positioning yourself for success in that environment, considering the five forces. A question to ask is ‘how am I positioning my business?’

-low cost player in which I will need to drive down cost of production, delivery and selling, whilst increasing sales in order to generate enough profit.

-differentiated player in which I focus on an area of distinction and quality, whereby I charge a premium price and accept somewhat higher costs of production, delivery and selling.

-Dual advantage player in which I am able to drive down cost of production, delivery and selling, whilst still maintaining an area of distinction and quality and so charging a premium price.  This is difficult and rare, and does run the risk of straddling, whereby you end up not benefiting the consumer through low cost or through actual greater value than competing products or services.

Scope and Positioning

Businesses operate to make profit; in which the cost of delivery (production, distribution and selling) is less that the price paid by the customer. When we look deeper into this concept, we can see that there is more complexity that meets the eye: In order to create profit or ‘economic value’, the perceived value by customers (what they willing to pay for that product/service) must be greater than the total cost of production delivery (being the cost of producing, distributing, marketing and selling).

Therefore:

Perceived value – Cost of production delivery (produce, distribute and selling) = Economic value created

If the cost of production delivery is more than the perceived value then the consumer is ‘perceived as saving’.

If the cost of production delivery is less than the perceived value then the business is making profit.

The ‘perception of value’ then is the key here.  Achieving competitive advantage is playing with both the perceived value and the cost of production delivery to generate more economic value than the competition.

To increase the perceived value of a product or service, the consumer needs to be able to quickly identify where a quality lies.  The impression therefore of all media (including webpages, flyers, business cards etc.), advertising and human contact, should highlight this quality (or these qualities).  First impressions give consumers a benchmark for initial perceived quality of the product or service.

Willingness to Pay

Another question to ask is: ‘What is the current gap between willingness to pay in my industry and cost of production delivery?’ Depending on the industry, consumers generally have a minimum cost expectation, and with that a willingness to pay benchmark for a product or service. For example, a willingness to pay benchmark to hire a plumber in Australia is perhaps around $90 per hour. A plumber charging $70/hour, is charging significantly below the expected cost – the consumer often initially perceives a reduced quality for a reduced price. With a plumber charging slightly below the minimum expected cost at say $80/hour, the consumer is likely to see this as ‘saving’ for close to the expected quality of service. With a plumber charging slightly greater than the minimum expected cost at $100/hour, the consumer often initially perceives a slightly increased quality for a slightly higher price. A plumber charging $110/hour runs the risk of the consumer perceiving a loss, in which the cost is significantly higher than the minimum expected cost, for only a small increase in quality. The range of quality of service of a plumber is not expected to be particularly wide.

If we were looking at the used car industry for example, the range of quality of the product is expected to be wide. For the same used car, you can generally find a wide range of prices online, usually depending on the number of qualities the seller is able to highlight (such as low mileage, service history, appearance etc.). In your industry, then, can you generate higher perceived value, whilst accepting some slightly higher product delivery costs? Conversely, if you maintain perceived quality at the industry minimum expected, can you drive down the cost of product delivery? Doing both successfully; increasing perceived value, whilst driving down product delivery is both difficult to initiate and even more difficult to maintain.

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