Answer: An investment strategy refers to the amount and types of resources– both human and financial–that must be invested to get a competitive advantage.
In deciding on an investment strategy, a company must evaluate the potential returns from investing in a generic competitive strategy against the cost of developing the competitive strategy. In this way, it can determine if a strategy is profitable to pursue and how profitability will change as industry competition changes.
Factors of investment strategy:
Two factors are crucial in choosing an investment strategy:
Strength’s of a company’s position: Two attributes used to determine the strength of a company’s relative competitive position.
- First, the larger the company’s market share, the stronger is its competitive position and the greater the potential returns from future investment. This is because a large market share provides experience curve economics and/or suggests that the company has developed brand loyalty.
- The strength and uniqueness of a company’s distinctive competences are the second measure of competitive position. If it is difficult to imitate a company’s research and development expertise, its manufacturing or marketing skills, its knowledge of particular customer segments, or its reputation or brand name capital, the company’s relative competitive position is stronger and its returns form the generic strategy increase. In general, the companies with the largest market share and strongest distinctive competence are in the best position.
Stage of industry life cycle: The second main factor influencing the investment attractiveness of a generic strategy is the stage of the industry life cycle. Each life cycle stage has different opportunities and threats from the environment associated with it and each stage, therefore, has different implications for the amount of investment of resources needed to obtain a competitive advantage.
Choosing an investment strategy at the business level:
- Embryonic stage: In the embryonic stage, all companies, weak and strong, emphasize the development of a distinctive competence and a product/market policy. During this stage, investment needs are very great because the company has to establish a competitive advantage. The appropriate business-level investment strategy is a share-building strategy. The aim is to build market share by developing a stable and unique competitive advantage to attract customers who have no knowledge of the company’s products. Companies require large amounts of capital to build research and development competences or sales and service competences.
- Growth stage: At the growth stage, the task facing a company is to consolidate its position and provide the base it needs to survive the coming shakeout phase. Thus the appropriate investment strategy is the growth strategy. The goal is to maintain the company’s relative competitive position in a rapidly expanding market and if possible, to increase it—in other words, to grow with the expanding market.
- Shakeout strategies: By the shakeout stage, demand is increasing more slowly and competition by price or product characteristics has become intense. Consequently, companies in strong competitive positions will need resources to invest in a share-increasing strategy to attract customer from weaker companies that are existing in the market. In other words, companies attempt to maintain and increase market share despite fierce competition.
- Maturity strategies: By the maturity stage, a strategic group structure has emerged in the industry, and companies have learned how their competitors will react to their competitive moves. At this point companies want to reap the rewards of their previous investments in developing generic strategies.
- Decline strategies: The decline stage of the industry life cycle begins when demand for the industry’s product starts to fall. There are many possible reasons for this, including foreign competition or product substitution. A company may lose its distinctive competence as its rivals enter with new or more efficient technologies. Therefore, it must decide what investment strategy to adopt in order to deal with new industry circumstances.
With a market concentration strategy, a company attempts to consolidate its product and market choices. It narrows its product range and exists marginal niches in a attempt to redeploy its investments more efficiently and improve its competitive position.
An asset reduction strategy requires the company to limit or reduce its investment in a business and to extract, or milk, the investment as much as it can. This approach is sometimes called a harvest strategy, since the company reduces to a maintain the assets it employs in the business and forgoes future investment for the sale sake of immediate profits.
Turnaround strategies may be applied at any stage of the life cycle by companies that are in weak competitive position. If the company is stuck in the middle, then it must assess the investment costs of low-cost strategy has not made the right product or market choices, or a differentiation has been missing niche opportunities.