What is Strategy?

The success of any business is determined by the effectiveness of the strategy it follows. A strategy explains how a company plans to compete in a competitive market and how it intends to grow at a profit consistently.

Businesses worldwide sell goods and services in competitive markets that require them to increase the value for their owners and shareholders to secure their continued future existence.

This needs a plan that helps managers guide their decisions and use resources effectively to achieve key objectives. This plan is also known as a business strategy.

What is a business strategy?

A business strategy outlines the plan of action to achieve the vision and set objectives of an organisation and guides the decision-making processes to improve the company’s financial stability in a very competitive market.

In order to reduce complexity, many online sources refer to a simpler definition of strategy as:

A high-level plan that helps a business achieve its goals.

While this is still accurate, it does not give a good understanding of how these goals are actually achieved.

A strategy is the central, integrated, externally oriented concept of how a firm will achieve its objectives. Strategy formulation (or simply strategizing) is the process of deciding what to do; strategy implementation is the process of performing all the activities necessary to do what has been planned. Neither can succeed without the other. The two processes are interdependent from the standpoint that implementation should provide information that is used to periodically modify the strategy.

However, it is important to distinguish between the two because, typically, different people are involved in each process. In general, the leaders of the organisation i.e. management, formulate the strategy, while everyone else in the organisation is responsible for strategy implementation.

How is strategy different from tactics?

While both terms are often interchangeably confused, they are two entirely different things.

A strategy refers to an organisation’s long-term goals and how it plans to reach them. It shows the path to achieve the defined vision.

A tactic refers to the specific actions taken to reach the set goals in line with the strategy.

For example, company A’s strategy might be to become the cheapest provider in the smartphone market. Their managers then need to negotiate with suppliers to reduce the costs of the electronic components used in production. This is a tactic to achieve the set strategy.

Strategy is buying a bottle of fine wine when you take someone out for dinner. A Tactic is getting them to drink it. — Frank Muir

Levels of business strategies

There are three levels at which strategies are typically used: (1)Corporate, (2) Business and (3)Operational/functional level.

All three levels form the strategic framework of an organisation;

1. Corporate Level: Corporate level strategies are the strategic plans of an organisation’s top management. They form the mission and vision statement and have a fundamental impact on the firm’s long-term performance. They guide decisions around growth, acquisitions, diversification and investments.

2. Business Level: Business level strategies integrate into the corporate vision, but with a focus on a specific business. At this level, the vision and objectives are turned into concrete strategies that inform how a business is going to compete in the market.

3. Operational/Functional Level: Functional level strategies are designed to answer how functional departments like Customer Service, Marketing, HR or R&D can support the defined business and corporate strategies of an organisation.

It is not uncommon for a firm to have multiple strategies at each level. This is in fact essential to ensure that the different needs of each layer are accurately reflected.

Although multiple strategies carry the risk of conflicting priorities and objectives, these risks can be reduced if managed correctly by a competent team.

Why is a business strategy important?

The implementation of a strategy is a critical success factor for any business.

It reflects the strengths and weaknesses of the company and answers how the company plans to respond to the threats and opportunities in the market in which it operates.

A strategy takes into account the resources at hand and how to best deploy them to achieve its set objectives.

That’s why a strategy is often called the lighthouse for a company’s management. It aligns the efforts of all functional departments and gives its employees a direction that guides their daily decision making.

To clarify this point, if a business does not have a strategy, how will it compete in the market?

The absence of such a blueprint would lead to disordered actions in each department, limiting the organisation’s effectiveness as a whole. The end result would continuous putting out of fires by the employees on an every day basis with no sense of direction. This incoherence always results in a loss of competitive power that will be exploited in the market. The end result is loss of customers and business in the market place.

There are natural weaknesses within all organisations for various reasons. What a business strategy does is try to remedy these weaknesses so that companies don’t trip up and suffer their impact too greatly. Strategies look at these future risks and help develop ways in which they can overcome these obstacles.

Some reasons why having a strategy is important:

Guide

A well defined business strategy will offer a guide on how your business is performing internally. Also, how you are performing against your competition and what you need to stay relevant into the future.

Trends

A strategy can identify trends and opportunities in the future. It can examine the broader changes in the market such as political, social or technological changes, as well as consumer changes, and can develop tactics so your business can modify and develop to suit these future changes.

Vision

A business strategy creates a vision and direction for the whole organisation. It is important that all people within a company have clear goals and are following the direction, or mission of the organisation. A strategy can provide this vision and prevent individuals from losing sight of their company’s aims.

Competitive Advantage

Finally, by creating a business strategy a company can create a competitive advantage and ultimately understand more about themselves and where they are going.

How do you formulate a business strategy?

A business strategy outlines a documented plan of action to achieve the vision and set objectives of an organisation and guides the decision-making processes to improve the company’s financial stability in a competing market.

The above definition already gives some practical advice on how to build an effective strategy.

A strategy needs to outline the vision of a business, define its targets and how it is going to grow and compete long-term.

The strategy building process can be broken down into five steps:

Step 1: Define your vision

Strategy formulation should begin by defining the objectives of an organisation. This presumes that the offering, the market and the target customers have already been defined.

For a strategy to be successful, it must first consider the company’s core values and its desired future position in the market. This is also known as the company’s vision.

Examples of vision statements from some of the largest companies include:

Apple:

“Apple strives to bring the best personal computing experience to students, educators, creative professionals, and consumers around the world through its innovative hardware, software, and internet offerings.”

Amazon:

“To be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”

Based on a firm’s vision, the offer, its customers and the market can be defined.

This is an important step in the strategy building process because it ensures that the designed strategy reflects the actual needs of the relevant market.

Offer and Value Proposition

An effective business strategy builds directly on the company’s offering and value proposition.

The former lays out what goods and services are offered, while the value proposition explains why people should buy them in the first place.

Note that the value proposition answers why a firm exists and how it is different from its rivals. In other words, it explains how a firm plans to create demand and compete in the market.

To illustrate this with an example, take a look at Shopify. Their value proposition is to offer a single ecommerce platform that lets its customers sell across multiple channels.

Customers

Another vital step in building an effective business strategy is to define the type of customer a company serves.

Customers are either categorised as consumers (B2C) or businesses (B2B).

Both groups have different criteria, reasons and motivations for purchasing goods and services. Knowing them allows a firm to accurately address their specific needs and wants in its strategy.

Target Market

Finally, strategy builders need to be clear about the market their offering and value proposition are targeting.

• If a firm sells to consumers (B2C), a market can be defined by demographic and socio-economic factors, such as gender, age, occupation, education, income, wealth and where someone lives.
• If, however, the offering targets other businesses (B2B), markets are typically defined by using factors such as the industry, business or sales model of the targeted customer groups.

Step 2: Set your top-level objectives

After defining the vision, the next step in formulating a business strategy is to set an organisation’s top-level objectives.

These objectives are usually focused on increasing a firm’s sales and profits, as they ensure its existence and improve the shareholder value if publicly traded.

That’s why a strategy essentially aims to answer the question of how a business can compete in the market to grow its revenue, while also improving its financial position.

Note that the formulation of high-level objectives does not include any goals to achieve a company’s mission or to reflect its core values.

This is because the sole purpose of a generic business strategy is to increase the company’s economic value for its owners or shareholders.

The core values and mission are later taken into account when designing the lower-level strategies, such as the marketing or operational strategy.

Step 3: Analyse your business and the market

Once the vision and objectives are defined, strategy builders need to become aware of their business’s strengths and weaknesses and the opportunities and challenges in the marketplace.

This can be done using a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats):

The information obtained in the course of a SWOT analysis serves as a basis for the strategy formulation that considers the company’s internal characteristics and the external situation of the market segment.

These insights allow decision-makers to ensure that a firm’s strengths exploit the opportunities in the market, while also addressing potential weaknesses and threats that can limit the organisation’s long-term success.

Different strategies can emerge from a SWOT analysis:

Step 4: Define how to gain competitive advantage

The fourth step in the strategy formulation answers the question of how the set objectives are achieved.

Firms that sell in competitive industries need to define how they want to compete in the market, create demand and increase their sales and margins.

Types of business strategies

Harvard Business School professor Michael E. Porter identified three types of generic strategies that businesses can choose from when defining their competitive advantage:

1. Cost Leadership,
2. Differentiation, or
3. Focus.

However, firms can also fail to pursue one of these generic strategies effectively. Michael Porter refers to this as being “stuck in the middle”.

In this case, a company does not offer a product or service unique enough to entice customers to buy. At the same time, the price of the offering is too high to compete effectively in the market.

Failure to gain a competitive advantage will result in a poor sales performance, which threatens the future company’s existence.

Michael Porter’s Generic Competitive Strategies Framework:

The different ways a company can gain a competitive advantage:

Cost Leadership

Cost leadership refers to a company’s ability to produce a product at the lowest cost possible in its industry.

This cost advantage can be achieved by using economies of scale, proprietary technologies or the ability to create and maintain cost benefits along the supply chain.

The cost leadership strategy requires a firm to effectively lower its cost structures while charging prices for its products that are in line with the industry average.

Example: Low fare airline Ryanair is a typical example of a firm that applies a cost leadership strategy. They successfully compete in the airline industry by driving down costs and utilise economies of scale. For that reason, Ryanair only operates one type of aircraft the Boeing 737–200 in its entire fleet of planes.

Differentiation

In a differentiation strategy, a firm seeks to create a unique offer that is valued by its target customers. Buyers must perceive the offer as far more valuable compared to other alternatives in the industry. In return, a company is able to demand higher prices for its products.

Example: Starbucks is a great example of a firm that has successfully implemented a differentiation strategy. While it sells coffee which is a widely available commodity, its well-designed stores, and the unrivalled number of flavour variations are the reason why customers are willing to pay a premium.

Focus

The generic strategy of focus aims at only a small number of target market segments. Porter’s matrix defines the competitive scope in these cases as narrow, as a firm only aims at a small portion of the wider market segment.

In that case, a company can either have a cost focus or a differentiation focus;

When a firm seeks to gain a cost advantage, it follows a cost-focused strategy. The firm’s offer is a low-cost alternative to the leading product in the market that still appeals to a specific group of buyers.

On the other hand, the differentiation focus seeks to cater to a specific need in a customer segment. This differentiation focus is the classic niche marketing strategy many small and local businesses follow to compete against the larger chains in their market.

Example: Small online shops that specialise in offering vegan and vegetarian products are a good example of firms that follow a generic focus strategy. Their narrow target scope allows them to become the preferred choice of environmental and health-conscious customer segments.

Step 5: Build a strategy framework

Based on the execution of the previous steps, a generic business strategy can be formulated.

However, functions such as marketing or finance will not contribute effectively to this generic strategy unless it is translated into more specific lower-level strategies.

The formation of these lower-level strategies that sit underneath a generic business strategy is called a strategy framework.

It ensures the success of the generic business plan, as it captures the vision and needs of the single departments and aligns them with the higher-level objectives.

Product, branding, marketing or operational strategies are only a few examples that contribute to the success of a firm’s overall generic business strategy.

How to measure strategy success

Business strategies are successful when they are directly responsible for growth and improved competitive or financial performance.

The success of a strategic plan can be evaluated by monitoring a range of Key Performance Indicators(KPIs).

It is however important that;

• these KPIs measure the level of achievement of the objectives defined in step 2 of the strategy formulation process.
• the KPIs are defined before the strategy implementation takes place to ensure accurate measurement.

Normally, some or all of the following KPIs are measured when implementing a new business strategy:

Growth

• Sales revenue
• Number of customers
• Repeat customer sales
• Customer retention rate
• Conversion Rate
• Average Order Value (AOV)
• Business Volume

Competitive Position

• Market share
• Market position
• Sales win rate
• Brand awareness & press mentions
• Margin position vs. industry average
• Sales growth vs. industry average

Financial Performance

• Gross Profit
• Net Profit
• Operating Profit
• EBIT and EBITDA
• Return on Assets
• Free Cash Flow
• Operating Cash Flow

In practice, companies may measure strategy success in a more granular way. This is because each individual departments define or should define their own lower-level strategies.

Business Strategy Examples

Examples of companies that have successfully implemented their generic business strategy: Amazon and Reckitt Benckiser.

Example 1: Amazon

Amazon is known for its great customer service and fast shipping options.

While its vision is to be earth’s most customer-centric company, Amazon makes this a reality by continually innovating in existing and new markets. The result is further accelerated growth and greater shareholder value.

In his first shareholder letter in 1997, Amazon founder Jeff Bezos himself outlined the four principles that guide the company: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence and long-term thinking.

Amazon’s generic business strategy is to gain a competitive advantage by driving down costs (cost leadership), paired with its ability to innovate in competitive markets.

The focus is always the same: serving the needs of end-customers.

This allows Amazon to overtake its competition that often struggles to catch up with the tech giant within several years.

Its lower-level strategies (operational, marketing, etc.) all follow the generic strategy of focusing on choice, price and economies of scale to create value for customers.

This strategic framework has allowed Amazon to become one of the most successful technology companies in the 21st century.

Example 2: Reckitt Benckiser

Although the company’s name may not be known by many consumers, Reckitt’s brand portfolio consists of major household brands, such as Finish, Dettol, Nurofen, Vanish, Durex, etcetra.

Faced with slowing sales and increased competition way back in 2012, the company had to change its business strategy to return to a path of solid growth.

Under the new strategy, Reckitt Benckiser:

• Focused on R&D for new product lines that allowed it to achieve its high-level objectives to increase sales and margins;
• Increased its budgets in markets that grew above-average to stimulate further growth;
• Overhauled its brand and marketing strategies and increased budgets in those areas;
• Set and closely monitored multiple key performance indicators with the aim to increase its net revenue growth.

While Reckitt Benckiser could not achieve all of its set targets, the modifications of its business strategy helped the company to grow its sales and profits above the market average.

As a result, it grew £33 billion in value for its shareholders between 2012 and 2017.

Conclusion

Strategy formulation is coming up with the plan, and strategy implementation is making the plan happen.

There are different forms of strategy. Business strategy refers to how a firm competes, while corporate strategy answers questions concerning the businesses with which the organisation should compete. International strategy is a key feature of many corporate strategies. In some cases, international strategy takes the form of outsourcing or offshoring.

An overview of the strategizing process involves a SWOT (strengths, weaknesses, opportunities, threats) analysis and the development of the organisation’s mission and vision.

It takes a lot of business acumen, determination and hard work to make a business succeed, beat the competitors, and have the upper hand in the competitive arena within the marketplace.

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