Strategic planning is a vital task for any company, as it is through it that the organization will seek sustainable and competitive growth. Therefore, it is not a trivial activity or one that can be carried out without care, and good legal advice is an important ally to increase the chances of successful planning.
A traditional view of strategic planning is found in the book “Competitive Strategy” by Michael Porter, which presents three different strategies that are commonly used by entrepreneurs:
- Cost strategyThe goal is to gain a competitive advantage by offering products or services at lower prices than other competitors in the same market. For this strategy to work, the company will seek to reduce its costs (such as labor, raw materials...), achieve greater efficiency in its production processes, and gain economies of scale, for example.
- Differentiation strategyThrough this strategy, the company aims to offer a unique, unmistakable product or service with high added value. Luxury brands or companies with exclusive and/or innovative technologies are examples of organizations that use the differentiation strategy.
- Focus strategyThe focus (or focus) strategy, finally, is the one aimed at meeting a specific need in the market, in the most efficient way possible. In the focus strategy, there is a limited number of clients served, through a much more restricted portfolio of products/services (sometimes the company offers only a single product or service), making the company a critical supplier for that market.
Each strategy brings different risks and opportunities, which can be better managed through contractual arrangements, preventive action and integration between the company's business strategy and legal strategy.
Let's look at some examples!
Cost strategy
When a company adopts a cost strategy, it needs to reduce its expenses as much as possible in order to maintain its competitive edge over other competitors with the same strategy.
One of the major risks, then, ends up being the use of suppliers who do not comply with labor legislation, subjecting workers to degrading conditions. It is an unfortunately quite common situation, and it should be properly managed through a procedure ofdue diligenceof suppliers – an increasingly relevant activity given the importance of the ESG agenda, and it is no longer acceptable for companies to simply claim that they were “unaware” of the practices of their outsourced workers or suppliers.
Another risk faced by a company that adopts a cost strategy is the adjustment of its input prices, which often requires passing the increase on to consumers (with the loss of competitive advantage). To prevent situations like these, it is important that supply contracts include clear clauses on price adjustments (using indices compatible with the peculiarities of the business), as well as rules regarding the passing on of exceptional adjustments or the possibility of termination without penalties in case of excessive cost increases for one or both parties.
Differentiation strategy
The differentiation strategy usually requires large investments – whether indesign, whether in Research, Development and Innovation (RD&I), or even in talent acquisition and retention.
For companies that adopt this strategy, legal support will be related to several activities, such as: protection of intellectual property (trademarks, patents,softwares), from registration with the INPI to eventual legal actions to prevent the improper use of the differentiating elements; confidentiality and non-disclosure agreements;partnershipandstock optionsto retain key employees for the success of the differentiation strategy.
Furthermore, it is natural that the company requires large amounts of capital to develop its products or services. At this point, it may be necessary to draft complex contracts with investors, in which legal counsel will assist in choosing the investment modality among the available options in the legislation (such as angel investment, convertible loan, partnership in a joint account, etc.) and will oversee all steps of the investment contract execution, from initial negotiations (which may be regulated through a Letter of Intent) to the drafting and finalization of the contract (with the release of funds and conversion of the investment into equity, for example).
Focus strategy
Through the focus strategy, the entrepreneur ends up attracting risks related to the smaller market niche that he will serve – which can put him at a disadvantage when faced with the risk of new entrants (i.e., competitors that may emerge in the future) and substitute products/services.
Here, in addition to the fundamental protections related to intellectual property, it is important that contracts with clients contain exclusivity clauses with an adequate duration, a well-defined scope of incidence and sufficient penalties to preserve the entrepreneur's investment.
It is also important that contracts contain non-competition clauses, to prevent the company's customers from developing the solution being contracted internally; as well as non-solicitation clauses, in order to prevent customers from hiring employees, partners or service providers of the organization, normally a strategy to internalize that activity.
From the examples above, it is clear that legal advice is an important ally of strategic planning, as long as there is a careful and adequate look at the directions the organization intends to take – and what the real legal needs of that business are.
Sergio Luiz Beggiato Junior is a lawyer at the Rücker Curi law firm – Law and Legal Consulting.
