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Financial strategy is a very vital functional strategy especially for a new business. New business are usually shaky because of the inadequate cash flow and unpredictability in the markets meaning that financial strategies can really help a new business to withstand the pressures and huddles that usually accost such business. This paper will dwell on financial strategies for a new business starting with methods of financing a new business. It will then dwell on risk assessment and management, project financing and then business level financial strategies.
There are very many ways that an enterprise can be financed. Most of the financing usually comes from the shareholders or the owners of the enterprise. However, some enterprises usually go for other sources to finance their operations. This is especially when the amount of shared holder capital is not enough to finance its various operations. There various ways of financing an enterprise are classified under equity financing and debt financing.
Debt Financing: Loans
There are very many methods of debt financing. These include bonds placements, leverage buyouts, debentures etc. However the most popular method of debt financing is the regular loan and there are different categories of loans. There are short term loans, long term loans and credit lines immediate needs. Loans are normally endorsed by co signers or secured using collaterals like real estate, stocks, insurance etc. before lenders can give a loan, and there are some factors that they consider. These include the 2 year history of enterprise operation, the enterprise niche in the industry, its market share growth, the level of cash flow and its ability to acquire supplementary financing from other lenders (Brian, 2000). Most lenders ask the prospective loanee to prepare. A proposal for a loan or an application for the loan.
The request may be accepted or turned down after a consideration of a variety of factors including reasonable collateral as a loan security. Loans should not be used to invest in fixed costs that may not have any monetary returns in the near future. They should be invested in variable costs that are supposed to bring in more returns than the cost of the loan. Loans can be dangerous in the early stages of an enterprise because the business operates from a negative perspective and it is very hard to evaluate the profitability of the business. It may also hurt the business ability to start of a firm foundation. Loans are stronger options for businesses that are strong and established. The entrepreneur always asses the needs of the enterprise in order to evaluate the level of debt financing that is required. Drawing plans of businesses that have complete projections of cash flow can aid in this process.
Advantages of Loans
One of the advantage of loans and other methods of debt financing is that the entrepreneur retains total ownership of the company meaning that there is no outside control. This helps the entrepreneurs to make independent strategic decisions and ensure that the profits do not flow out of the company's realms. A loan also helps the entrepreneurship to retain its financial and operational freedom because the debt regulations are only covered by the loan period (Gibson, 2000). The lenders do not have any valid claim on the company once the loan has been settled. When a loan is paid in time, the credit ratings of the business go up thus driving up its creditworthiness. Loans as compared to equities are easier to be administered because they do not require the bureaucratic reporting processes that are evident in most of the equity financing approaches .In the long term; loans are usually less costly especially for the small businesses than equity financing. One of the chief advantages of using loans is the benefit of tax deduction. This is because the principal amount and interest are taken as expenses of the business meaning that they are exempted in tax calculations. This is very beneficial to the enterprise because this means that the loan is being repaid at a lower interest rate.
Disadvantages of Loans
One of the disadvantages of taking a loan to finance a business is the unpredictability of the business environment that means that if the business fails, the entrepreneur will still be forced to make the repayments. The problem occurs when the business goes into bankruptcy because the lenders will demand to be paid before any equity investor is paid. The other disadvantage is the high rates of interests that are not stable (Gibson, 2000). There are also severe penalties in case of defaulted payments or late submission of installments which can have an adverse impact on the credit rating of the business. The instrument is not readily available to all kinds of business and it might be hard fro businesses that are not proven to obtain loans. The amount of money that can be availed by a loan is also limited and may not have much impact meaning that it cannot be used alone as a means of business financing.
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Equity financing: Stocks
Equity financing consists of funds that are raised by an enterprise in exchange for ownership stake. This means that equity investors can take part in the decision making process of the business and take active management positions in the enterprise. One advantage of equity financing is that the funds do not have to be repaid. The equity investors are attracted to enterprises that have an ability to be a market leader and they have clear exit strategies that allow them to obtain good returns on the investments that they have made. Equity investments are not collateralized; they have higher risks than loans. In equity financing, the lending company gets partial ownership of the company after giving the enterprise the funds which are normally not paid. Equity financing is becoming a more fashionable method of funding enterprises. The concept of selling stocks is becoming more glamorous and most entrepreneurs are taking this route as they prefer to raise the money in form of equities and not debts.
Advantages of Equities (stocks)
Selling stocks to raise capital is appealing to most entrepreneurs because there are no obligations for repayment to the equity investors as opposed to the loans (Gibson, 2000). If the company goes under liquidation, it is the lost of the equity investors and an entrepreneur will not be required to pay up. Another way in which equities in form of selling stocks is a more alluring mode of raising capital is because the investors become part of the company and they bring with them a wealth of business experience and much expertise that will help in the running of the enterprise. The other advantage is that there is no limited amount of money when it comes to raising capital using stocks because the amount of money to be raised is dependent on the amount of control you want to cede to the equity investors. If the investors earn good revenue, then they tend to be interested in the future projects of the enterprise which helps to sustain a smooth business flow. There is no collateral required by the business to attract equity investors neither is there penalties like there are in case of a loan default. This is a kind of real financing where the business can count on its profits because the amount invested by the equity investor is not counted as a liability. New businesses find it difficult to get lenders to give them loans but for, equity financing, a new business with sound ideas with good prospects can easily attract equity investors (Gibson, 2000). The instrument is readily available a variety of business and it might be easy for businesses that are staring up to obtain financing. The amount of money that can be availed by equities wide, creating a big impact especially on small businesses.
Disadvantages of Equity Financing
Sourcing out finance for one's business using stocks means that you cede part of the business to the equity investors. This means that the entrepreneur does not have total control of the business and the equity investors will also like to take part in the strategic decision making process. The profits earned by the business also do not belong to the entrepreneurs alone; the equity investors will also want a piece of the profits made. If the stocks are opened up to a large number of investors, the paperwork may be overwhelming and the process very involving. Equity financing can easily lead to lawsuits if the entrepreneur does not act in the best interest of the equity investors (Gibson, 2000).
There are various ways in which risk in finance can be defined. One of the most used definitions is the variability levels of returns from an investment made. This means that if the variability is high, the risk is very great and because most investors fear risk, investment that are made where there is a great inherent risk must therefore promise a higher yield expectation. Risk can also be looked at from an uncertainty point of view where risk can be seen as the levels of uncertainty that are there in an investor after making a certain investment especially if the actual returns are negatively different from the projected returns (Nicholas 85). One of the most vital concepts is the relationship between risks and returns whereby the zero risk investments such as the treasury bonds have very low yields or returns. This means that the greater the amount of risk involved, the higher the rate of returns. The other definition of risk is the probability that the actual returns of an investment will not be the same as the expectation of the investors. This includes the probability that some of all of the investments can be lost and one of the historical measurements of risk is the standard deviations of the historical returns of a particular investment.
Financial risks may be dependent on different factors, but most of the factors are market related. Other factors include mode of operation or fraudulent mannerisms of the people involved in the investment. There may not be a standard definition of risk and different theorist have put forward different definitions depending on the financial perspective that they take but one thing that is common in all these definitions is the notion of the after the fact level of regret after the failure of an investment. The role of the financial markets in the definition of risk cannot be underestimated because they provide a solid foundation for the methods of assessment of risk in a general manner (Nicholas 89). These methods are purely mathematical and their impact always interferes with some other social goods such as valuation, transparency and disclosures and it is not always the case that these financial instruments will hedging on the reduction of risk or increasing it and this may expose the investor to a myriad of catastrophic losses when pursuing windfalls that are very high thus increasing the expected value. While defining risks, it is important to reflect on the regret measures because they rarely make a reflection of the human risk aversion meaning that it is very difficult to make a determination of the outcomes of the financial transactions and their level of satisfaction. This means that risk seeing is a description of an individual who has a positive second derivative and this individual will be able to assume every risk in the economic set up thus cushioning the investment against loss.
There are different types of risks that are involved in a financial investment. These are the credit risk, the legal risk, the source risk and the model probability risk and what is very crucial to an investor is the knowledge of appetite for risk which must go hand in hand with the financial well being of the investor. The relationship between risk and return is also very important in the determination of the financial risk factor of particular investment . This is because, the greater the financial return that an investment seeks, the greater the risk that the investor has to assume. This definition of risk factor is very important especially in the free markets because of the dynamic pricing mechanisms. Generally, a strong demand for a financial instrument that is safe will drive its price up in a free market meaning that the returns may be disproportionately lower. The same suit follows in a converse fashion for a riskier financial instrument that has a weak demand because the weak demand will drive the prices of the instrument down and in this way the potential returns will be higher.
Measurement of risk
There are 2 ways in which risk can be measured. One is by the use of the theory of modern portfolio theory that includes capital asset pricing approach and looking at the different risk factors that affect a business (Nicholas 91). The capital asset pricing theory makes some assumption about financial investments and the preferences they make. While using this approach (CAPM) to find the discount rate that is proper there are three things that an investor must have knowledge of, these things are the stocks beta, the free ate of the nominal risk and the expected return based on the market. Ideally, stocks that have betas that are greater than one are riskier than the betas in the market that are less than one. This CAPM and the modern portfolio theory concentrate on the main ideas that drive diversification where there are diversified portfolios that contain securities that have less or even no correlation to other securities in a market or these securities are subsequently placed in some portfolios that will greatly reduce the volatility that may be associated with it (Nicholas 93). In the measurement of the financial risks using the aforementioned approach there are some advantages and disadvantages that can be realized. This is because the model assumes that the people making the investment will get a return based on premiums for taking the risk in the market of for the non diversifiable risks. However the advantage is that it will be able to differentiate between market risk and risk that is firm specific. The second way to measure risk is by taking the risk free rate that is nominal by matching the rates on the government bonds with the potential or projected yields. For example, measuring the risks on an investment of five years should use the 5 year bond given by the government. By adding the expected risk premium to this you will get the required discount rate but this will differ on the different types of risk premiums that are in the market. There are five risk premiums that are worth consideration while making the measurement for potential investment risk (Nicholas, 93). These are the financial, liquidity, business, political and foreign exchange risk. While measuring the financial risk, it is important to look at the capital structure of a company especially focusing on the debt and equity levels and the current ratio of the both. Business risk measurement entails measuring the economic factors that affect the operation of the investment at hand. This involves looking at the strategic plans of the company assessing the position of company , the way it will be , a certain time in the future, say, five or ten years from now. Liquidity risks measurement involves measuring the ease or the difficulty that is involved in the sale or buying of the company. The firms that can be easily bought or sold are said to be liquid meaning that are marketable and studies have shown that the firms that are thinly traded or privatized are usually sold at a discount that is significant in comparison with firms that are similar in the market that is active.
Finally, the measurement of the foreign exchange or the political risk involves the study of the trends of the firms that conduct international or overseas business. For example, the risk can be measure using the demand supply curve and this is especially evident in those traders that export to Asian counties because of the low demand for a variety of products in those countries (Nicholas 93) . It also involves the measurement of the various government restrictions on international trade especially now that different countries have different accounting rules meaning that the returns on stock investments may be affected by these diverse rules.
Project finance is the financing of infrastructure in the long-term. It can also involve industrial projects and is based upon the project cash flows and not the sponsors of the projects and the money they have.It is a very innovative, creative and time saving technique of financing that is normally used by high profile corporates in their numerous projects. Euro Disney land and Euro tunnel are some of the projects that used project financing. It employs a very skillful use of a mix of engineering and financing and some of the toughest projects like refineries, mining, geothermal etc are funded this way. It is the most common method of financing projects In the world today. Unlike the other methods of financing it utilizes the rationale of fiscal planning, risk assessment and fund raising .
Due to the high level of risk involved, a lot of energy and resources are invested in the planning process, making it the most successful method because few projects financed this way have failed. Some of the planning phase components include contractual design, legislative provisions with the government that is hosting, partnerships with the public sector evaluations and financing structures, cash flow projections, accounting and tax considerations and validation of the feasibility of the project . Project financing is preferred because it maximizes the leveraging of the project and circumvents restrictive covenants that may bind the sponsors to some illogical fiscal obligations. It also allows the lenders to make an appraisal of the project from a stand alone basis that is segregated. It also affords the sponsors a better tax treatment and avoids negative influences of the sponsors credit standing. One of the unique features of the project financing is the involvement of equity financiers that are referred to as sponsors together with syndicated lenders .This means that the risks that the project may be exposed if loans are used alone are minimized through the entry of the equity investors. The loans here are not ordinary loans. They are what are referred to as non recourse loans that are paid from the cash flow and secured by the assets of the project(Buljevich & Park ,1999). This is unique because the creditworthiness of the sponsors of the project is not put into consideration neither are the general assets used to guarantee security. The security of the financing is secured by all the assets which include the contracts that produce revenue. This means that the project will be taken over by the lenders if the company does not comply with the terms of the loan.
Another unique feature is the creation of the special purpose entity for every project to cushion the assets of the sponsor from the adverse effects of the failure of the project. This mean that the the company has no other assets apart from the said project . To ensure that the project is sound fiscally, it is important for the owners of the projects to make capital contribution also. The other factor that makes project financing more complicated and more unique when compared to conventional methods of financing is the shift from the conventional applications like mining, telecoms etc to public infrastructure covered through the PPP or public private partnerships. The other unique component is the risk identification factor . This is because there are political, economic and even technical risks that a project may be subjected to especially in the markets that are emerging or in the countries that are developing. This means that there are risks posed that can make the project unfinanciable. This means that special entrants are glowed in to cushion the sponsors from the risks and allow the financing to take place . The financing is distributed among multiple companies as a way of sharing the risks that are involved. If there are less risks, the profits are shared evenly among the multiple parties that are involved in its financing. Another way is the securing of limited resource financing from the sponsors which is more expensive and riskier. After risk allocation there is risk management that mitigates against the occurrence of a risk and the consequences it can pose. This is done by the constant reporting to the sponsors on the project account controls .
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There are also unique risks that are associated with project financing that are not that common in conventional methods of financing. One of the most common risks is the phase of construction risk because of the difficulties of construction and delays that increase the cost of the project. This may put the contract in jeopardy because of the increasing debt and the waning patience of the sponsors. Thus in project financing, the risks must be minimized before the lending takes place by making liquidation claims that will make the sponsors to pay the damage if the project is not completed by the agreed date. This does not happen in conventional financing methods. The sponsors are also required to inject some equity into the project to show their interest in the project. This is because if the sponsors are in equity, they will share the risks with the owners of the project. The operation phase risk is minimized by the use of expert reports and making use supply contracts that are long term to protect against fluctuations in prices. There are other risks that increase the cost of operation thus making the original projections higher. This may have an adverse effect on the owners of the project because the financiers may not cover the inefficiency in the operation. This is why in project financing a reputable operator who is sound financially is given contracts that are secured by performance bonds. Project financing can minimize the off take risk by turning the generated product into hard cash. A market risk can occur if the buyer for the product cannot be found and this is mitigated by entering into a sale contract before the lending takes place. The financiers. In project finance also do not use technologies that are new and prefer the old ones because of the technical risk that is involved. This is the best way of mitigating technical risks in project finance.
Finally project financing uses non recourse debt that limits the discretion of the management by transferring project revenues to repayment of debts . This reduces cash flow making the company to achieve higher leverage as compared to the sponsors. This on the other hand may pose idiosyncratic risks that may vary with the project at hand because of the nature of portfolio financing versus single ventures. This is because both the market and the operating risks are not covered in the recourse while in the traditional financing, the host government would cover the market risks. Here, they enjoyed credit protection, overt and covert risk guarantee, derivatives of credit and insurance against macroeconomic risks like the inflation and currency fluctuations(Besanko &Kanatas, 1993).
In conclusion, the world is moving away from the conventional corporate finance methods to project finance due to the unique features of project financing that afford both the sponsors of the project and the owner of the project flexibility of the highest level and also ensures that there is maximum risk reduction even before the financing takes place. The risk posed by using loans only is minimized through the entry of equity investors through equity tools like bonds and rights placement which gives a better cushion from some of the risks because these bonds and rights are usually public, attracting a large number of equity investors that generates sound capital that can see the project through without major expected or unforeseen hiccups.
Business Level Financial strategies
Business level strategy is an amalgam and interlinked set of actions and commitments that a company, an organization uses to gain competitive advantage by taking advantage of the integral competencies in specialized markets of products .the strategies are geared towards creating a difference in the firms' position as compared to the position of the competition. For a firm to take an advantageous position in the market it must make a decision whether it will carry out its operations in a different manner or it will carry out its operations relative to the rivals. These operations include product development, Strong coordination among departments, subjective measurements, use of incentives instead of measures that are quantitative. The other factors that can create a competitive advantage include creation of an environment that attracts highly skilled manpower and creative labor force. Product engineering, creative sense, excellent marketing capabilities and high reputation also enhance the competitive advantage of a firm. Other things that determine whether the firm will be competitive include the leadership of the firm, value chains available, strong market research capabilities, experience in the industry and the right combination of skills that are drawn from diverse businesses.
There are some resources and capabilities that have been documented by the pundits in the business circles to be the best source of a competitive advantage of a company over its competitors. The first resources are the customers. Without the customers, there can be no market to compete in. any market is driven by the customers, their preferences and their purchasing powers
This means that for a firm to have a competitive advantage, it must be able to determine the central role of customers in its operations. In this case, while selecting a business level strategy, there are some various things affirm has to determine. The first thing is the market segmentation, meaning that the firm has to identify the segment of the market it wants to serve. Secondly, it must identify the needs of the targeted segment of the market so that it can work to satisfy them. Then it must identify how the needs will be satisfied so as to create customer loyalty and attract more as they retain the exissting ones. The firm must also set strategies of how to strengthen relationships with customers by giving them a high quality value than any other competitor in the market. This will help the customers develop a competitive advantage by enhancing the value of the existing one. The competitive scope of a firm can be determines by five generic strategies. These are the competitive advantage, the competitive scope, the cost, broad target and the uniqueness of the products and the services of a firm.
The first business level strategy that a firm can adopt is called the cost leadership strategy which refers to an amalgamated set of actions that are structured to deliver services and goods at the lowest cost possible in comparison to the rivals while maintaining value that will appeal to the existing and the new customers. This means that the products must be standardized, with features that are acceptable to the consumers . This will enable the firm to cut costs as it maintains quality of service and satisfaction given to the customers. There are some costs saving actions that this strategy needs to be effective. These include the installation of effective scale facilities, tight control of the entire overhead cost, minimal sales costs, existence of efficient facilities for manufacturing, simplification of the process of production and the proper monitoring of outside costs (Sharp, 21). There are certain requirements that must suffice from the strategy to be used effectively. According to an acclaimed business author, Michael, E Porter, there must be the economies of purchasing meaning that the relative market share must be very high.
Secondly, firm must have a favorable access to raw materials because if the access to raw materials is not that favorable, the cost leadership strategy my encounter some difficulties. The firm must also make structures and the designs of products in a way that there is an ease in manufacturing. This will drive down the cost of operations. The maintenance of cost leadership can be enhanced through the reinvestment of high margins. Some of the examples of firms that have succeeded in using this strategy include the Emerson electronics, Black and Decker and the Texas Instruments. The cost leadership strategy can be defended against the five forces that were developed by Michael Porter . The first force is the competitors and in this case the position of low costs can make heavy returns especially after all the competitors have used all their profits to out do each other in the competitive market in bid to carve a bigger niche of the market share. The second force illustrated by porter is the power of suppliers and in the case of the cost leadership strategy the suppliers can give more room for the firm to cope with the increase of the costs of the inputs. When it comes to the buyers as a competitive force; there is a possibility of the buyers forcing the prices down almost to the level of the lowest rival even if they move out of the firm as the main supplier. The fourth force illustrated by Michael Porter is the new entrants and in the case of cost leadership, there are some scale economies that in most cases prohibit the entry of new players in the market which keeps the competition low, improving the cot advantages(Dess 111)'. The other force is the threat of the substitutes and alternatives and in this case, the firm having adopted a low cost potion will be able to reduce its process so as to have a balanced price value relationship which means that the firm is not threatened by substitutes and the alternatives in the market. However there are some competitive risks that are associated with the cost leadership strategies.
The most prominent one is lack of vision when it comes to cost reduction. Some managers of firms are so myopic in their attempts to reduce cots that they tend to overlook the needs and the preferences of the customers. This makes the firm to compromise on quality in order to cut costs leading to dissatisfied clients who will definitely look for alternatives and substitutes (Dess 19). The second competitive risk that may afflict the cot leadership strategy is the imitations of the low cost strategy by rivals thus watering down the efforts of the firm. The rapid changes in the technological world can increase costs instead of reducing them and this can nullify the gains made by the cot leadership strategy. The other competitive risk that the firm might be exposed to by the cost leadership strategy is the danger of conservatism. A firm using this strategy can become averse to change making it remain with practices and principles that may not be competitive in the contemporary business world and this gives it a competitive disadvantage instead of an advantage. There are specific times that are desirable for the use of the strategy. The most opportune time is when the firm is already a leader in the market and there are price wars. This will enable the company to gain when the rivals are using their resources to battle each other. In a case where stiff competition does not abate, using strategies that cuts costs can help the firm to emerge victorious in the attrition war.
The other strategy in the business level strategies geared towards the role of the customers is called the differentiation strategy. The differentiation strategy is a set of actions that are structured by a company to deliver services and goods at a cost that is acceptable in that the customers see as if something different has been done to guarantee satisfaction. Acceding to Fred smith, the founding director of the FedEx, the main tenet of differentiation is innovation. For a firm to create products that will constantly appeal to the mass market without losing its luster, it must be enhanced through differentiation. The price of the goods and services can be more that what the clients are willing to pay so long as the differentiation creates value that was not there in the fist place(Fahey,2000). This is because the customers are known to have a knack for features that are differentiated than they value a lower cost. A customer can go for a unique product that is more expensive that the ordinary version of the product because they expect more value from the different product. This means that the business level strategies of firms should adopt differentiation strategies that offer the customers unique products even if it means at a higher price. Unique products at a higher price will tend to fetch more revenue than ordinary ones at a lower price and this is a factor that can give a business competitive advantage over its rivals in the market that have ordinary products at low cost(Dess 96)' .
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The advantages of the differentiation strategy to a firm is that the value that is provided by the unique products and service features usually attract a premium price and give the customers a higher level of satisfaction. This is because the products and the services have superior quality; they are exclusive and more prestigious. For a firm to succeed through this strategy, it must design new ways of doing things and develop new systems. It must also shape perceptions of the differentiated products and services through intensive marketing campaigns and rigorous advertising because this is another way in which competitive advantage is created. The firm must also focus on the enhancement of quality that will make the product exclusive and prestigious. There are some defenses that can be made for the differentiation strategy against the porters five forces strategy (Dess, 96). To start with, when it comes to competitors, the rivalry may decrease if the firm manages to create a brand that the customers will remain loyal to. This will create a lower sensitivity to the cost of products and services meaning that increase in the cost of the products and services will not make the customers switch to the competition. When it comes to the suppliers, if there is an allowance of an increase of the margin of the prices, the customers can manage to tolerate the supplier price dynamics without affecting the firm's operations.
In the case of the buyers, the differentiation strategy removes the purchasing power element when it diffuses the alternatives that are comparative. For the force of the new entrants and availability of substitutes, the differentiation strategy creates a situation where the competitors have to overcome the loyalty of the consumers to a firm and the uniqueness of the products crated through the differentiation. However, there are some competitive risks that may be associated with the differentiation strategy. To start with, the price can go a level where it becomes sensitive to the customers where despite their loyalty and the uniqueness of the product, the feel that they can no longer afford that product. This means that if the difference between the standard price and the differentiated price is so high, it might force the customers to look for alternatives and substitutes and the firm will be at a competitive disadvantage. The second issue is that buyers may decide that they don't want unique features that have been brought through differentiation (Scott 82). If they find that the special features do not add value to their lives, they may opt to buy the standard product meaning that the competitive advantage that the company wanted to gain through the process of differentiation may not be achieved despite the additional costs incurred and the resources used. The third competitive risk that a firm undertaking a differentiation strategy may pose is the imitation of the uniqueness of the product by rival firms. According to J.W. Marriot, the founder of the Marriot Company that started the ill-fated Yugo brand, this imitation may dilute the uniqueness thus making the product standard meaning that the competitive advantage that may have been gained through differentiation will be missed.
The other business level strategy that is effective in strategic management is the focused business level strategy. A focused strategy should exploit the narrow differences of targets from the balanced industry by creating a market segmentation that will create isolation of some buyer groups and unique segments of a certain line of a product. This will enable it to concentrate on a particular segment of the geographic market thus creating what is called matching. This integrated business level strategy that uses embraces the cost leadership and the differentiation strategy is beneficial to businesses because it enhances the position of the company in the market
This means that the business or the firm gets a better position in which it can adapt to the dynamic macro and micro environmental changes. The firm also learns new skills and technologies in the process that enable it to efficiently leverage its vital competencies while competing with the rivals in the competitive market. This can guarantee returns that are long term because of the resultant customer loyalty and affiliations. The customers also benefit by getting two levels of values; the one that is differentiated and the lower cost value. There are some competitive risks that are associated with the focus strategy. To start with, there are a wide range of competitors that may find some methods of matching the services and the products that have been focused by the firm. Secondly, the modern world is very dynamic and the modern consumer is not like the conventional consumer meaning that the shift in the consumer needs and preferences may affect the focused strategy. The other risk is that one or more competitors in the market may be able to find a finer segment within the targeted segment of the firm which means that the competitive advantage is not guaranteed in this case. The best time to sue this strategy is when there are no competitors in the market segments that have been targeted and when the available human and material resources do not allow the firm to operate in segments that are wide.
Also, when there are diverse groups of customers that are using a certain product provided by the firm in various ways, because it will be easier to create product lines and segment the market. Finally, the other best way to use this strategy is when the market segments in the industry that the firm is operating in have diverse sizes, levels of growth and revenue bases. The most important thing that a firm can achieve is a market share. However, the competition for the 'market share is very stiff meaning that for a firm to survive the competition; it must have a competitive advantage over the rivals. The above business level strategies that include the cost leadership strategy, differentiation strategy and the focus strategies can be very useful in helping a company or a firm to carve its niche in the market by taking advantage of the available resources to give it a competitive edge. However, as the company's and the firms fight to gain the competitive advantage in the market, they should not forget the role of the human capital in the implementation of the strategies (Coyne 96). Human capital is the most important asset in a firm and with the correct leadership that is strategic; a firm will be able to use the business level strategies to create a competitive advantage. This will translate into increased revenue for the firm and additional value to the share holders of the firm.
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