A company achieves strategic competitiveness when it is successful in formulating and implementing a value creation strategy. That is the definition, according to Hitt, Ireland, and Hoskisson in their book, Strategic Management: Competition and Globalization. Value creation allows companies to outperform their competitors by producing superior performance.
See some companies around you. Many of them run big businesses. However, not all create value.
Companies might have a great vision and mission. They also have a good value proposition to customers and design a strategic plan in detail. However, all of that does not guarantee the success of value creation, for example, for reasons of weak strategy execution.
Meanwhile, other companies outperformed their competitors. They sell more and control the largest market share. Again, that is no guarantee of creating value. Business performance is excellent, but their financial performance does not reflect that. The superiority of business performance does not result in high returns on capital due to thin profit margins. Finally, the advantage is most likely temporary.
- A strategy is a plan of action or policy to achieve company goals. Companies usually design it in three horizons, short term, medium-term, and long term. The documented strategy is what we call a strategic plan.
- Value creation is an effort to make a company valuable to its stakeholders. That was achieved when the company delivers a return on capital invested higher than the average player in the industry. To do this, companies must create satisfying products and services. Furthermore, in conducting business, they also care about the natural environment and society and comply with regulations.
- Competitive advantage is a condition when a company has a superior and profitable business position. They achieve this by creating value and delivering above-average returns.
Why is strategic competitiveness important?
The company’s primary goal is to achieve sustainable competitive advantage. To do this, companies must have strategic competitiveness. That requires not only design but also the implementation of a successful value creation strategy.
Value creation allows companies to make high profits. They deliver returns that benefit investors, more than what their competitors offer.
Not only that but creating value means they are also socially responsible. They also prioritize environmentally friendly businesses.
The company achieves it all through strategy. They design and implement strategies that create value. If successful, they have strategic competitiveness. If not, it is just “strategic.”
To achieve a sustainable competitive advantage, companies must ensure competitors are difficult or too expensive to duplicate their strategic competitiveness. That often requires a combination of radical innovation, market expertise, and courageous leadership.
When they succeed in creating value, companies excel competitively. In textbooks, companies with competitive advantages produce above-average returns, measured by return on invested capital (ROIC).
How to achieve
The value creation strategy requires having core competencies. It requires superior resources and capabilities and is difficult to duplicate. To exploit it, companies must have a thorough knowledge of both in every area of the company.
Creating value requires a holistic approach. Companies, according to the Boston Consulting Group, need to devise a comprehensive value creation strategy by aligning three strategies:
- Business strategy
- Financial strategy
- Investor strategy
Companies can start by developing fact-based cash flow forecasts and future performance to be achieved. From there, the company identifies which strategic areas contribute to creating value. Then, they allocate capital and resources to these areas.
Say, the company identifies online channels as one of the contributions of future cash flow. The channel is the key to selling more products in the future. The company also sees online channels as the right path to reach a strong position in the market. They can increase the company’s branding and visibility through it.
To exploit online channels, companies build interactive websites. Consumers can trade on these sites. They also introduce social media, allowing customers to spread information more widely.
Financial strategies include decisions about funding, investment, and dividends. Investment decisions related to capital investment and current investment. Financing decisions include capital structure targets and how companies manage a combination of equity and debt. Meanwhile, dividend decisions relate to dividend growth and dividend payments. Financial strategies also focus on issues of tax strategy and hurdle rates for investment projects or mergers and acquisitions.
In order to run well, companies should balance the use of equity, debt, and free cash flow in a balanced manner. The company must also have a clear plan for it.
Essential investors for companies because they contribute capital. When satisfied with the company’s performance, they are willing to provide money when the company needs it.
The value creation strategy should be consistent with the priorities and expectations of the investors. For example, companies need to take specific growth initiatives that provide a return above the cost of capital. If returns are less than the average company in the industry, it can disappoint investors, encouraging them to withdraw money from the company.