Importance
of strategy for shareholder value
Our columnist talks about the importance of companies having well
focussed strategies and the methods they use to survive and thrive
in business against the inevitable competition.
There
was once a Chinese general by the name of Sun Tzu who according
to legend never lost a battle. This is because he always knew his
enemy as well as his own capabilities. Based on this knowledge he
built strategies which were unique and which his enemies couldn't
match. I believe the business environment today is also similar
to a battleground where success is about developing strategies,
which will create sustainable competitive advantage.
What
is strategy?
Strategy is simply the game plan your business has developed to
achieve competitive advantage and to earn a superior return for
you, the investor. One certainty today is the existence of unlimited
competition. To survive and to achieve success in this setting there
is a need for a strategy.
Main
strategies which have to be developed
It is important to have strategies in the following areas:
1.How do we compete
2.How do we expand with products and markets
3.How do we grow the business
How do we compete?
This
is known as the generic strategy of a company. Firms can compete
using three methods, which are cost leadership, differentiation
or focus.
Cost leadership is an approach whereby a firm becomes the lowest
cost producer in the industry to such an extent that it has a cost
advantage over its competitors.
SLT,
Phoenix Plastics, Maliban are some local firms who I can see as
cost leaders. If a firm is to achieve cost leadership it has to
build capacity and scale and reduce the cost per unit by using this
scale.
All firms cannot be cost leaders. Therefore others will have to
differentiate themselves in the market.
Among
the reconditioned vehicle dealers AMW differentiates itself through
a better service.
Abans differentiates itself in terms of convenience, accessibility
and a wide choice.
A common form of differentiating of course is branding which would
create Munchee Marie vs. Maliban Marie. Successful differentiation
would result in the ability to charge higher prices than the other
firms in the market.
While
many firms may target the whole market, many would be successful
by targeting segments to whom they would create value. Focus is
a strategy whereby customers are limited and the whole market is
not targeted. BMW focuses on the luxury segment unlike the other
car manufacturers who operate across many segments.
Expanding
products and markets
Four options are available to firms in this regard and they are
as follows
1.Penetration - Increasing the sale of the product in the existing
market - the approach attempted by Dialog
2.Product development - Introducing new products to the existing
market- Suntel Wow internet facility to existing customers
3.Market development - Taking the existing product to new markets-
Damro sells its furniture in India
4.Diversification - Moving into new products with new markets as
JKH, Access or Hayleys have done.
Growth
strategies
How is the business going to grow to create wealth for the shareholders?
The approaches here would include the following.
1.Organic growth - Growth using internal capabilities and by starting
businesses from scratch
2.Acquisitions - Buying other companies similar to P&G's purchase
of Gillette recently
3.Mergers
- Two firms combining as what happened between HP and Compaq
Message to the investor
Evaluate whether your corporate has a strategy as to how value is
going to be generated for you. Investing in companies which do not
have a clear strategy, is similar to walking towards a dead end
blind folded.
(The writer could be reached at - ravim@icbsgroup.com)
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