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Bruce Greenwald, one of the nation?s leading business professors, presents a new and simplified approach to strategy that cuts through much of the fog that has surrounded the subject. Based on his hugely popular course at Columbia Business School, Greenwald and his coauthor, Judd Kahn, offer an easy-to-follow method for understanding the competitive structure of your industry and developing an appropriate strategy for your specific position. Over the last two decades, the conventional approach to strategy has become frustratingly complex. It?s easy to get lost in a sophisticated model of your competitors, suppliers, buyers, substitutes, and other players, while losing sight of the big question: Are there barriers to entry that allow you to do things that other firms cannot?
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Business strategy doesn't have to be as complex as it is often made out to be. In fact, if you fully understand the competitive structure of your industry, an aSubTextropriate strategy can usually be developed around the answer to just one question: “Are there barriers to entry that allow us to do things other firms cannot?"
■ If your answer to that question is“No,”then strategy is not really an issue. You have no competitive advantage, so you either pursue operational efficiency aggressively or you exit your current market segment and enter a different segment where you will have a competitive advantage you can exploit. You don’t try and outmaneuver the competition by employing a superior strategy but you try and run them into the ground by operating more efficiently.
■ When your answer to that question is“Yes,”strategy becomes of critical importance. Your profitability will be determined by how effectively you fend off potential entrants and manage the competition among your peers so as to fully exploit your competitive advantage.
Overall, despite what the experts and consultants say, business strategy is not the be-all and end-all of effective business planning. Nor is strategic planning the only available source of superior returns. Strategy does matter in the long run because if a firm pursues unrealistic strategic goals, poor business outcomes are virtually guaranteed. Strategy, however, is not the whole story. The best strategy in the world cannot offset the need for operational excellence or good management.
Good strategy formulation always focuses on three main goals:
To identify the competitive environment in which the business operates, and whether the firm has a competitive advantage
To manage effectively the interactions with the other firms on which your company's own performance depends
To develop a clear, simple vision of where your company needs to be heading in the future
There are really only three types of sustainable competitive advantage in business:
SuSubTextly—privileged access to resources.
Demand—customer preference for one brand over another.
Economies of scale—production efficiencies.
The first task in thinking about the best strategy for a business is to understand what barriers exist that would stop other companies from securing the same competitive advantage that the market incumbents currently enjoy.
The competitive advantage of a market incumbent may be derived from a combination of only three sources:
1. SuSubTextly—The market incumbent may have a lower cost structure that cannot be duplicated by its rivals or potential new rivals. This means the incumbent will be able to generate profits at prices and sales levels that would be unprofitable for any other firm. Would-be entrants to the industry can be discouraged by underpricing and out-servicing them. Note that the cost advantages of proprietary technology are often short-lived because rivals usually end up acquiring the same efficiencies the incumbents have enjoyed for a time.
2. Demand—This requires the market incumbents to have access to customers rivals cannot match. It also means customers must be“0held captive”to some degree—meaning the cost to change to a competing product is high enough to deter most customers from actually doing that. If a new market entrant wants to get established, it has to provide ways and means by which these search and switching costs will be offset.
3. Economies of scale—If one of the market incumbents is several times the size of its competitors, it is common for the larger firm's costs per unit to be lower. This means the bigger firm can be highly profitable at a price level that would leave its rivals losing money. When these economies of scale are combined with customer lock-in or captivity, a powerful competitive advantage can be generated. Competitive advantages based on economies of scale have three features:
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