Strategic planning is a vital task for any company, as it is through it that the organization will seek sustainable growth in a competitive manner. Therefore, it is not a trivial activity that can be carried out carelessly, 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 commonly used by entrepreneurs:
- Cost Strategy: the 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 (with labor, raw materials…), greater efficiency in its production processes, and gains in economies of scale, for example.
- Differentiation Strategy: through this strategy, the company aims to offer a unique, distinctive product or service with high added value. Luxury brands or companies with exclusive and/or innovative technologies are examples of organizations that use differentiation strategy.
- Focus Strategy: the focus strategy, finally, is one that aims to meet a specific market need in the most efficient way possible. In the focus strategy, there is a small number of customers served, through a much more restricted portfolio of products/services (sometimes the company offers a single product or service), making the company a critical supplier for that market.
Each of the strategies brings different risks and opportunities, which can be better managed through contractual arrangements, preventive actions, and integration between the company’s business strategy and its legal strategy.
Let’s look at some examples!
Cost strategy
When a company adopts the cost strategy, it needs to minimize its expenses to maintain its competitive edge against other competitors with the same strategy.
One of the significant risks then becomes the use of suppliers who do not comply with labor laws, subjecting workers to degrading conditions. This is unfortunately a quite common situation that must be properly managed through a supplier due diligence procedure – an increasingly relevant activity given the importance of the ESG agenda, where companies can no longer claim they “were unaware” of their subcontractors’ or suppliers’ practices.
Another risk a company adopting the cost strategy faces is the readjustment of its input prices, often requiring passing the increase on to consumers (losing the competitive advantage). To prevent situations like these, it is essential for supply contracts to have clear price adjustment clauses (using indices compatible with the business’s peculiarities) and rules on passing on exceptional price increases or the possibility of termination without penalties in case of excessively rising costs for one or both parties.
Differentiation strategy
The differentiation strategy often requires significant investments – whether in design, Research, Development, and Innovation (R&D&I), talent acquisition and retention.
For companies that adopt this strategy, legal support will be related to various activities, such as: intellectual property protection (trademarks, patents, software), registration with INPI, potential legal actions to prevent the misuse of differentiating elements; confidentiality and non-disclosure agreements; partnership and stock options plans to retain key employees crucial for the success of the differentiation strategy.
In addition, it is natural for the company to require large amounts of capital to develop its products or services. At this point, the drafting of complex contracts with investors may be necessary, where legal advice will assist in choosing the type of investment among the alternatives available in the legislation (such as angel investment, convertible loan, limited partnership, etc.) and will oversee all steps of the investment contract execution, from initial discussions (which may be regulated through a Memorandum of Understanding) to the drafting and finalization of the contract (including the release of funds and conversion of the investment into equity participation, for example).
Focus Strategy
Through the focus strategy, the entrepreneur ends up attracting risks related to the smaller market niche they will serve – which can put them at a disadvantage against the risk of new entrants (that is, 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 clauses of exclusivity with adequate duration, well-delimited scope, and sufficient penalties to preserve the entrepreneur’s investment.
It is also relevant that contracts contain non-compete clauses to prevent the company’s clients from internally developing the solution being contracted; as well as non-solicitation clauses, in order to prevent clients from hiring employees, partners, or service providers of the organization, typically a strategy to internalize that activity.
From the examples above, it is clear that legal advice is an important ally of strategic planning, provided there is a careful and adequate look at the direction 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 – Advocacia e Consultoria Jurídica office.
