Businesses can have multiple functions, product lines or provided services, but concentrating on a core business activity helps keep resources and key employees focused. Whether it is a bakery specializing in homemade pies or a German car manufacturer, understanding the core function helps a business run more optimally and gives it a competitive edge.
Before a company can focus on its core business activity, it must first define it. When using determination strategy, firms analyze each business unit by its strengths, weaknesses and synergy. Synergy is defined by the business units that somehow complement each other. Complementing business units mean that managers can focus and apply similar theories to every phase of the business, which is a desired outcome in the core business strategy. Managers examine their various products and/or services to determine the ones that complement each other in structure, positioning, customer base, manufacturing and capital needs, and revenue streams. In the end, their business activities will be pared down to the ones that are most strategically viable, thus becoming the business’ core.
Porter’s Generic Strategy
Porter’s generic strategy is a form of positioning strategy and is used by companies to decide how they are going to distinguish themselves from their competitors. Under this strategy, a firm’s positioning is determined by their cost advantages versus their product differentiations. They can choose a cost leadership strategy where firms distinguish themselves from their competitors by setting their prices higher or lower than the market. Or, they can choose a differentiation strategy where they create a product that is more unique than their competitors'. Lastly, firms can use a focus strategy where they concentrate their efforts on a niche or segmented market. In this strategy, price is less of a factor, as the aim is to be specialized.
Core Development Strategy
Using strategy to build on the core business functions can add either internal or external value. Managers can develop internal elements to make a business function more optimally. Strategies like improving distributional systems, changing the operational systems, or expanding geographically can make the business’ functions more cost-effective. For instance, a car manufacturer could take advantage of a new plant opening in a more cost-effective city. Oppositely, a firm could focus on adding external value, which would be the value reaped by customers. By adding supporting customer services, or upgraded product components, they can raise the value perceived by the customer, resulting in a competitive edge. An example of this would be the same car manufacturer developing and offering their customer a new safety feature, so innovative it positions them higher than their competition in value.
Partnerships, foreign direct investment, acquisitions and mergers are the heart of extension strategy. Firms looking for complimentary products or services, not manufactured in-house, can find them through partnerships with outside companies. This can be something as risky as an acquisition, where a larger company acquires a smaller company specialized in a specific related product, like a car manufacturer acquiring a new MP3 player manufacturer to exclusively include its technology in their automobiles. But partnerships do not have to be that risky. A firm could also opt to have a co-branded partnership with another company, each maintaining their own product lines, operational structure and brand information. For example, a pie manufacturer might have a partnership with a chain coffee franchise, to sell their branded product in their outlets.
It is normal that after a business has defined their core business, they revise and streamline it as time goes on. After all, economies and markets change as new opportunities and threats surface. A mature company might decide that they need to expand their core business in order to achieve a new level of company growth. On the other hand, a drop in the market could have them recoiling their activities back to essential (and more segmented) business functions. Redefining strategy takes into account that a business’ core is not a static thing, and that it must always change in accordance with the time. Constantly monitoring the core business' strengths and weaknesses can help managers spot opportunities and combat any threats.