Innovationhelps businesses find novel ways of creating value. The mostprofitable companies seek ways of introducing change simultaneously.A company can distinguish itself from its rivals by using thefeatures of the product that it is promoting. By investing inresearch, development, the introduction of new products and improvingexisting ones, a company can achieve substantial product innovation.The result of such efforts includes products that solve problems moreswiftly or at a lower cost. Also, as a result of research anddevelopment, the performance of products is enhanced, and theirdesign made more attractive. Thus, companies that differentiate theirproducts, based on reliability, performance, or even aesthetic appealare bound to seize a notable portion of the market. Companies such asGucci (aesthetic appeal), BMW (performance), and Hyundai ("morevehicle" for money) have succeeded because they have implementedthese measures.
Innovationis perceivable as finding diverse ways of producing value. Theability to sustain changes favors established firms while disruptiveinnovations favor new companies. Since consumers tend to move towardsnew products, product lifecycle becomes shorter. To maintaincompetitive advantage existing businesses seek ways of innovatingtheir products faster than their clients` needs demand. As a result,a chasm is produced since companies produce goods that, in the end,become too sophisticated and expensive for their customers. Increasesin prices prompt established businesses to concentrate on providingproducts to customers in the higher tier of the market to enablethese businesses to achieve a higher profit margin. Such actions openup a market for the less established companies, which, by extension,provide less expensive products to these clients. Eventually,customers in the lower-end market gain access to products that,initially, could only be afforded by the high-end market. Such ahappenstance leads to a decline in demand for products in thehigher-end market. The main disadvantages of disruptive innovationare smaller target margins, lower gross margins, and products thatmay not be as attractive as existing products.
TheKnowledge-based view of strategy posits that there are three types ofknowledge. They are implicit knowledge, explicit knowledge, and newinsights. Tacit knowledge is held by a worker and is lost when thatemployee leaves the organization. Explicit knowledge is codified andformal. This type of knowledge can be transferred relatively easilyand is not easy to protect. Lastly, new insights are more of anintersection between explicit and implicit knowledge. With thebefore-mentioned considered, knowledge can help an organizationmaintain sustainability if it contributes to averting threats ordiscovering opportunities, it is rare, cannot be matched quickly, andcan be leveraged in a manner that is resourceful. If knowledge helpsa firm avert risks or find new opportunities, the firm will be in aposition to avoid risks that could harm the organization or tap intoventures that other agencies are aware of. Also, if the knowledgecannot be matched easily, competitors will not be able to imitate thestrategies adopted by successful businesses.
Boththe Knowledge-Based View and Relational View of Strategy theorizethat knowledge is the primary determinant of improved performance inan organization. On one hand, the Knowledge-Based approach emphasizesthat enhancing organizational learning is critical. The approach alsoplaces emphasis on using this knowledge in a manner that is swifterthan the competition. By implementing such strategies, anorganization gains a competitive edge over its rivals. On the otherhand, the Relational View of Strategy posits that inter-firmassociations offer a significant competitive benefit to a businessover its competitors. Organizations may favor using one of thesemethods over the other. Firms that select the Knowledge-BasedApproach to concentrate on augmenting organizational learning andutilizing this learning faster than their opponents. In other words,this method supports the principle that a business should alter itsfocus to shifting from one competitive gain to the next quicker thanits rivals. Conversely, industries that select to use the RelationalView pursue associations with other companies to accrue supernormalprofits.
Verticalintegration is a means of synchronizing the various stages of anindustry chain in cases where bilateral trading has provenineffective. Vertical integration is highly risky, expensive, anddifficult to reverse. A business should only elect this approach ifit has developed sufficient risk analysis. Thus, even if a firmpossesses the requisite capabilities and resources, verticalintegration would not be a very prudent model to adopt if the cost ofopportunism is small. Reason being, the number of sellers and buyers,is critical to the success of vertical integration because problemsusually occur when the market has only a few buyers and sellers. Insuch situations, the coordination of the supply chain may bedisrupted. Since certain types of production require a "perfectfit," small errors may lead to costly outcomes. Also, if a firmuses market companies, private company information may leak. In theend, such an incident may result in changing the bargaining positionbetween a firm and its buyers and suppliers.
Astrategic alliance is a partnership between two or more enterprisesfor a specified period. In most cases, such businesses are not incompetition but have similar products directed toward a similartarget audience. Recent years have witnessed a proliferation ofequity-based alliances. Reason being, enterprises are now shiftingfocus from competition to cooperation. For example, Toshiba seeks todevelop strategic partnerships with different partners to dominate inthe area of technology. Also, companies find equity-based alliancesto realize their sales objectives for export markets. Mostfast-growth technology companies, for instance, Toshiba is usingstrategic partnerships to market their brands, create channels ofdistribution, and build brand reputation. Lastly, mid-size companiesare seeking alliances with reputable companies to gain entry into thehighly competitive international market. Such collaborations helpmid-size companies improve their products regularly and outperformtheir rivals.
Diversificationis a process through which firms expand their core businesses toother product markets. Studies have revealed that relateddiversification has proven more efficient than unrelateddiversification. Related diversification occurs when an enterpriseexpands its current product line while unrelated diversificationoccurs when a business adds a new product to its product line.Typically, related diversification results in higher returns becausea company enters a market where it understands both opportunities andthreats, giving it an advantage over the competition. On the otherhand, an enterprise that elects to engage in unrelateddiversification enters a new market. Such an approach may accrue somebenefits to a company, but the lack of knowledge and experience inthe new market may position the company below par, compared with moreestablished businesses. Thus, in most cases, businesses that selectthe related diversification approach are usually in a better positionto turn a profit compared with the firms that prefer adopting theunrelated diversification approach.
Mergersare perceivable as the coming together of two or more firms on aco-equal basis while acquisitions can be viewed as the taking over ofthe operations of one company by another. Studies have proven thatmergers and acquisitions, sometimes, fail to achieve the intendedbenefits. However, some measures can be instituted to prevent suchoccurrences. The first strategy is the roll-up strategy. Thisstrategy advocates for the consolidation of businesses to bring downthe costs of production. The second step is uniting to increasecompetitive behavior. To improve the Return On Invested Capital,executives in highly competitive industries consolidate to promptcompetitors to think less about price competition. The third step isentering into a transformational merger. Transformational mergershave the potential to transform businesses into entirely newcompanies by using the consolidation to drive change. Fourth, amerger or acquisition can realize the intended benefits by doing alot of deals. Such deals help the merger close gaps in itsoperations, thus, allowing the company to grow very quickly from abusiness that focuses on one product to becoming a key player in itsrespective industry. Lastly, companies that come together should dosmall deals to realize the intended goals. Emerging companies usuallyexperience difficulty accessing the market bigger companies canmerge with these small, innovative businesses to help them reach asignificant portion of the market.
Diversificationis the process of enlarging the essential businesses of firms toother product markets. This process can either be categorized asrelated, unrelated or mixed diversification. The related andunrelated approaches, adopted separately, have proven more efficientthan the mixed approach. Reason being, each strategy has its ups anddowns, and, in most cases, adopting both strategies simultaneouslyaccrues the negative impacts of both strategies to the business. Forinstance, implementing related diversification accrues benefits suchas a larger portion of the market since the company engages marketcompanies in transactions that it is knowledgeable about. However,underestimating the cost of some of the softer issues such as theintegration of two cultures or the manner in which employees aretreated may cost the company dearly. On the other hand, unrelateddiversification has advantages such as cost efficiencies oroffsetting cash flow in low seasons. Such an approach has thedisadvantage of venturing into the unknown: a business that one haslimited knowledge about. Thus, other companies may have an addedadvantage over the new business due to their vast experience inrelated transactions. A company that adopts a mixed diversificationapproach, therefore, faces the danger of being exposed to thedownsides both types of diversification, in addition to expendingsignificant amounts resources into ensuring these strategies work.