What is Business Strategy?
A business strategy is the means by which an organization sets out to achieve its desired objectives. It can simply be described as long-term business planning. Typically a business strategy will cover a period of about 3-5 years (sometimes even longer).
A business strategy is a set of guiding principles that, when communicated and adopted in the organization, generates a desired pattern of decision making. It is therefore about how people throughout the organization should make decisions and allocate resources in order accomplish key objectives. A good strategy provides a clear roadmap, consisting of a set of guiding principles or rules, that defines the actions people in the business should take (and not take) and the things they should prioritize (and not prioritize) to achieve desired goals.
- 1 What is Business Strategy?
- 2 The Need for Business Strategy
- 3 Types of Business Strategy
- 4 Categories of Business Strategy
- 5 Business Strategy Approaches
- 6 Key Components of Business Strategy
- 7 Business Strategy Formulation
- 8 Business Strategy Implementation
- 9 Business Strategy Benefits
- 10 Social Business Strategy
- 11 The Importance of Business Strategy
- 12 Integrated Strategy Model
- 13 Business and IT Alignment
The Need for Business Strategy
Why is there a Need for Business Strategy
In almost every case, it is ideal to retain customers than to constantly chase new ones. And this is one major area where business strategy is extremely necessary. In the absence of a sound business plan, you will find it hard to generate customer loyalty. Businesses that have no specific guidelines on how to cater to existing customers risk alienating the later, and a competitor can easily snatch them out of your hand just by emphasizing on customer service. So, what you need to do is develop a robust system of follow-up where calls are made and emails are sent to repeat customers not only to ensure that their products are operating properly, but also to let them know that your business cares for them. And depending on your line of your business, you can also send greeting card and gifts to repeat clients on occasions like Christmas. Another place in which a business strategy comes in handy is "resource allocation. Your business, no matter how big, will always have limited resources on hand, which necessities the need of efficient management so that these resources can be used with maximum efficacy. A sound business plan helps you weave together resources like employees, brand value, clientele, trademarks, and supply partners etc, to achieve a competitive advantage and also create products and promotion that speaks directly to your target market. If resources are not managed efficiently, then the business is likely to lose both revenue and customers in the long run. Thirdly, business expansion is also a goal which cannot be achieved without strategy. If your expansion goals are laid out in great detail, then it will help team leaders and executives to explore opportunities outside of your standard business practice to facilitate company expansion. You will be able to set aside budget and hire appropriate people for market research that can not only collect and collate data, but also analyze trends to help you spot untapped niches.
Types of Business Strategy
The Three Types of Business Strategy
In his 1980 book "Competitive Strategy", Harvard professor Michael E. Porter laid out three different types of strategies in business: differentiation, overall cost leadership, and focus. Any of these business strategies can be effective in the long term, but each has its own priorities for resource allocation. Which fits your business growth model?
- Differentiation: Companies undertaking this strategy must prove to the customer that they are different (and better) than the competition. A differentiation business strategy is less concerned with price. Your company can command higher prices for products or services because they stand out in some way; they are worth the extra money. Your long-term strategy is to cut costs in the areas that don't contribute to your differentiation, so you can remain cost competitive. Starbucks, for example, charges more for its coffee than Dunkin' Donuts. But it differentiates itself by focusing on high-quality products and sustainability, and by cultivating a brand image as the coffee of choice for the busy professional (while 'America runs on Dunkin doesn't have that same exclusivity).
- Cost Leadership: This is an easy business strategy to explain, but it's difficult to implement. The whole goal here is to be the cheapest provider of your product or service. Wal-Mart is the perfect example of cost leadership. They focus on providing a wide range of goods— – you can buy almost anything there, from Easter baskets to caskets—at rock-bottom prices. For most small business professionals, this strategy is out of reach. It works for large companies because they are selling on a massive scale. But you don't want to reduce your profit margins when you have fewer customers.
- Focus: Unlike differentiation and cost leadership strategies, a niche business strategy focuses on one small portion of the market. You're fulfilling a need that perhaps fewer people have, but there's less competition from other businesses. Think about craft beers, or nursing scrubs. Your marketing efforts are targeted, which can make them easier to hit. If you're advertising your dog food in Dog Fancy magazine, you're definitely reaching people who own or are interested in dogs.
Categories of Business Strategy
The Main Categories of Business Strategy
A business strategy is concerned with major resource issues e.g. raising the finance to build a new factory or plant. Strategies are also concerned with deciding on what products to allocate major resources to - for example when Coca-Cola launched Pooh Roo Juice in this country. Strategies are concerned with the scope of a business' activities i.e. what and where they produce. For example, BIC's scope is focused on three main product areas - lighters, pens, and razors, and they have developed superfactories in key geographical locations to produce these items. Two main categories of strategies can be identified:
- Generic Strategies: The main types of generic strategies that organisations can pursue are:
1. Growth i.e. the expansion of the company to purchase new assets, including new businesses, and to develop new products. The Inland Revenue has expanded from being just a tax collector, to other functions such as collecting student loan repayments and paying tax credits.
2. Internationalisation/globalisation i.e. moving operations into more and more countries. For example companies like Gillette, Coca-Cola, Kellogg's, and Cadbury Schweppes are major multinationals with operations across the globe.
3. Retrenchment involves cutting back to focus on your best lines. The Americans refer to this as 'sticking to the knitting' - i.e. concentrating on what you do best.
- Competitive Strategies: Competitive strategies are also important. Competitive strategies are concerned with doing things better than rivals. To be competitive a firm shouldn't just copy the ideas of rivals. They should seek to out compete rivals. There are two main ways of being competitive.
- By selling goods at lower prices than rivals. This is possible when a firm is the market leader and benefits from economies of scale.
- By differentiating your product from those of rivals - which enables you to charge a higher price if desired.
- By selling goods at lower prices than rivals. This is possible when a firm is the market leader and benefits from economies of scale.
The airline industry is divided into two main segments. At one end of the market are the premium price category firms such as British Airways that concentrate on differentiation. They offer better service to passengers, more legroom, in flight entertainment, and more individualised attention. At the other end of the market the emphasis is on being the low cost producer and is exemplified by 'no frills' airlines such as Ryanair. Ryanair focuses on short haul destinations and keeping its planes in the air as frequently as possible in a 24 hour period.
Economies of scale - The advantages that large firms have from producing large volumes of output enabling them to spread their costs over more units of output.
Differentiation- Making a product different from rival offerings e.g. through packaging and labelling, customer care, additional extra features, etc.
Business Strategy Approaches
Approaches to Business Strategy
- Internally-Driven Organizations: Most organizations are internally driven, which means that their strategy is driven by what they have done in the past; their thinking is inside out. The weakness with this strategy is that organization members are not anticipating changes that are happening in the marketplace.
- Customer-Driven Organizations: Customer-driven organizations are those who try to by close and ready to listen to the customer. The problem with approach is that these organizations end up trying to be “all things to all people.”
- Market-Driven Organizations: Lastly, Market-driven organizations base their strategy on making conscious choices about which markets they will serve and how they will add value. High performance organizations not only participate in the strategy process, they also understand which strategy will propel their organizations forward.
Key Components of Business Strategy
Elements of Business Strategy
The aim of every business is to be sustainable and to stand out from the crowd and attract customers. A coherent business strategy will help you understand the performance of a company, what drives that performance, how it can be increased, as well as protecting the company against future risks. All business is risky and no business plan can truly determine exactly what will happen in the future. Your market may seem safe now, but what about in five years? How will your business cope if competitors dramatically lower their prices? Or valuable employees lose morale therefore lower performance? Every business needs a safety net of protocol to help them make those tough decisions. What a documented strategy can do is give your business the extra support and guidance it needs if put to test. Here are some of the key elements for a good business strategy:
- Creating the key objectives and goals of your business for the short and long term and creating a message employees and colleagues can stand behind.
- Reflecting critically on the real weakness of your business internally and externally.
- Evaluating the possible risks your business may encounter .i.e weakness in product/service performance compared to the competition.
- Evaluating future market changes that will or may effect your customer and anticipating those changes.
- Describing your financial features and requirements. For example, displaying your costs, ROI, and profits and losses, and what future investment may be needed.
- Once you have created your business strategy it is important to then monitor its success. You can make sure your business strategy is on schedule and progress is always on track by using this planning document as a bench mark.
Business Strategy Formulation
Formulating a Business Strategy
The 6 steps described here will guide you in formulating a strategy; they involve looking outside and inside your organisation, thinking about how you will deal with threats and opportunities as they present themselves, building a good fit with strategy supporting activities, aligning resources with goals and organising for execution.
- 1. Look outside to identify threats and opportunities: There are always threats in the external environment: new entrants, pressures from suppliers e.g. single point of failure, substitute products your customers are drawn to, your customers purchasing power etc. The external world also presents opportunities: new technology, unexploited market and so forth. So ask yourself these questions:
- What is the economic environment in which we must operate and how is it changing?
- What opportunities for profit lie before us?
- What are the risks associated with various opportunities?
- 2. Look inside, at your resources, capabilities and practices: Resources and internal capabilities can be a constraint on your choice of strategy, especially if you are start-up with few employees and fixed-assets. A strategy can succeed only if it has the backing of the right set of people and other resources. So ask yourself these questions:
- What are our competencies? How do these give us an advantage over the competition?
- What resources constrain or support our actions?
- 3. Consider strategies for addressing threats and opportunities:
- Create many alternatives. There is always more than one way of doing things.
- Check all facts, and question all assumptions.
- Assess what key information you are missing to better assess a particular strategy, and then get the information.
- Vet the leading strategy choices among the wisest heads you know (this does not need to be your team).
- 4. Build a good fit among strategy-supporting activities: Strategy is more than just winning customer; it is also about combining activities into a chain whose links are mutually supporting and effective in locking out your competitors. Your competitive advantage comes from the way the activities fit and reinforce one another. For example, if you are an airline company and your strategy is based on a rapid gate turnaround, so you can make frequent departures and better utilize your aircraft assets, this will support the low-cost, high convenience proposition you offer to customers. Each of these activities supports the others and the higher goal.
- 5. Create alignment: Developing strategy is half the job. The other half is creating alignment between the strategy and the people and activities of the company. In other words every employee at every level must
1) understand the strategy and
2) understand his or her role in making the strategy work.
Alignment also involves other resources: marketing must be focused on the right customers, bonuses must be aligned with behaviors and performance that advance the strategy, and physical assets must be deployed – aligned with the highest goals of the organisation.
- 6 Be prepared to implement: After you have a strategy you have a free hand in organizing around it: hiring people with the necessary competencies, acquiring the right equipment, structuring resources, and so forth. As UCLA’s Alfred E.Osborne Jr has put it, “I think of the 4 S’s: structure follows strategy, and staffing follows structure, and you hold the strategy together with systems.”
If your strategy is disappointing you must be willing to
1) recognize the bad news and
2) respond quickly with a revised strategy.
A start-up business should be viewed as an experiment. If the experiment fails to produce the desired results, be prepared to change – and quickly.
Business Strategy Implementation
Implementing A Business Strategy
Implementing your plan includes several different pieces and can sometimes feel like it needs another plan of its own. The steps below may be used as a base implementation plan. Modify it to make it your own timeline and fit your organization’s culture and structure.
- Finalize your strategic plan after obtaining input from all invested parties.
- Align your budget to annual goals based on your financial assessment.
- Produce the various versions of your plan for each group.
- Establish your scorecard system for tracking and monitoring your plan.
- Establish your performance management and reward system.
- Roll out your plan to the whole organization.
- Build all department annual plans around the corporate plan.
- Set up monthly strategy meetings with established reporting to monitor your progress.
- Set up annual strategic review dates, including new assessments and a large group meeting for an annual plan review.
Business Strategy Benefits
Benefits of Having a Business Strategy
- Clarity, focus and direction. If you have a business strategy in place you will be clear on where your business is now, where it is going and what you need to do to get there. This will give your business clarity, focus and direction as you can align the business to achieving the business strategy. You will be making your business strategy happen rather than letting your business drift along without purpose.
- Drive and impetus. Developing your business strategy will give you and your team the drive and impetus to perform at your best and take the business to where you want it to be.
- A better understanding of your current business. To develop a business strategy you need to understand where your business is now. This involves looking at your business overall, including the key internal drivers such as financial performance, customer satisfaction, staff turnover, sales and marketing trends, conversion rates etc. You will also need to consider the strengths, weaknesses, opportunities and threats associated with your business and understand the external business environment, your competitors and the market you are in. This will all put your business in a much better place to move forward.
- Agreement on the longer term future of your business. In developing the business strategy you will agree on the longer term vision and what you want your business to achieve. You may be looking to increase your profitability by x%, to create value in your business for a future sale or keep your business at the size it is now. By working on your strategy and debating the issues you will come to an agreement in your business as to where you want your business to be in the longer term.
- Identifying the key steps needed to achieve your strategy. Working on your business strategy will enable you to identify the key steps and milestones to move your business from where it is now to where you want it to be. This will be invaluable for informing your planning and day to day business activities.
- Promote discussion, debate and alignment in your business. To arrive at a business strategy that everyone in the business supports you will need to have a lot of discussion and debate within your business and amongst your senior team about where the business is now, where you want it to go and how you are going to get there. By getting to an agreed strategy as a team this will align everyone on the same track and wavelength giving you more chance of success.
- New opportunities for the business. Reviewing and working on your business strategy involves a lot of creative thinking which is likely to generate new ideas and opportunities for the business which you may not have identified otherwise.
- Time to reflect and re-look at your business. Spending time on your business strategy will mean stepping back from the day to day of running the business, reflecting on your business and re-looking at all areas of your business. You will find that this reinvigorates your business and team and challenges the status quo.
- If you know where you are going you have more chance of getting there. If you don't have a business strategy you are not clear on where your business is going and it is unlikely you will move your business to where you want it to be. Having a strategy in place increases your chance of getting there.
- Better business results. Developing a business strategy is likely to lead to better business performance as you are focused on taking the business to where you want it to be. You are less likely to get distracted and waste time on areas that are not moving you towards your long term objectives.
Social Business Strategy
Success Factors of Social Business Strategy (See Figure 1.)
Social business is not a marketing strategy or a technology roadmap but rather a way or philosophy of how business could be done differently…in a much more human manner. Let’s start with Altimeter’s definition of a successful Social Business Strategy (SBS). It is one that aligns with the strategic business goals and has alignment and support throughout the organization.
- Define the overall business goals: You can’t align your social strategy with your business objectives if you don’t even know what your objectives are.
- Establish the long-term vision: If you’re not striving toward the end goal, you’re likely to veer off the path. If you want your team to fully invest in your social strategy — and you need the support of your entire team – you’ll need to communicate your vision with clarity and passion.
- Ensure executive support: In the early days you may be able to fly under the radar, but at some point, if you want to truly have an impact on the business, you’ll need the backing and support of key executives.
- Define the strategy roadmap: You already know your business objectives and have a clear vision. But how are you going to get there? Plan out your route, what roads you’ll travel, and what roads you’ll avoid.
- Establish governance and guidelines: Who is responsible for executing the social strategy? What’s your process of listening and responding to your customers? If you clearly define this process and then stick to it, you’ll spend less tie floating along throughout the social sphere and more time strategizing your social growth.
- Secure staff, resources, and funding: In the early stages of social growth, you might outsource your social media campaign to an agency, and that’s fine. But you should also be looking down the road and planning to develop internal resources to take your company to the next level as your social prowess — and your business — grows.
- Invest in technology platforms that evolve: Resist the temptation to jump on the latest technology bandwagon before you have a long-term strategic plan in place. Hold off on making significant technology investments until you’re equipped with a sound vision and strategic plan.
Figure 1. source: Brian Solis
The Importance of Business Strategy
Why is A Business Strategy Needed
Strategy is fundamental to the success and sustainability of any organisation for the following reasons:
- Understanding your company and industry: Strategy allows organisations to develop a clearer understanding of their own organisation and what’s required for them to succeed. It helps organisations understand their core capabilities, identify and address weaknesses and mitigate risks. It can help organisations better design themselves so that they are focusing on the right things that are the most likely to deliver the best performance, productivity and profit both now and in the future.
- Growing in a changing world: Understanding what is taking place within the external environment is important to preparing a strategy that will ensure long-term profit and growth. Understanding changes that are taking place in your industry, or with your market place is important. Because if you don’t adapt you die. Even successful businesses need to realize that what made them successful today is not what will make them successful tomorrow. With the rate of change becoming faster every year, it’s increasingly important that we understand what trends are going to impact on our business and our industry, and how we’re going to respond to them. Whether political, social or technological, we need to what changes are going to affect our businesses. And we need to know how our organisation can respond to them. It enables us to find opportunities for growth and sustained profitability and it can help us identify and respond to changes that could make us extinct. In the same way that the motor vehicle put many horsewhip makers out of business, it’s important that you understand what can affect you and your business both short term and long term.
- Creating a vision and direction for the whole organisation: All organisations and their staff need to understand their purpose, their destination and the course they’re taking to get there. A company without a strategy is akin to sending your staff into the desert and leaving them to follow mirages in search of water. Without a destination and focus in mind your staff will wander aimlessly from one activity to the other never knowing what to focus on or how to prioritize. Providing an organisation with a common purpose, goals and a set of actions to reach the goal ensures that everyone is working for the same outcome (your organisations success) and that time and resources are being allocated to the same goals and objectives. Simply it streamlines your business and ensures every dollar and minute you spend on the business is in the direction of your sustained success. While strategy is can be difficult for many organisations to commence, its benefits are far-reaching and many. From creating new business opportunities, to streamlining the operations and engaging staff, a well-formulated strategy will enable increased growth, productivity and profit both now and into the future.
Integrated Strategy Model
Integrated Strategy Model (See Figure 2.)
There are many 'plans' that seek to help manage a business. The business plan, the marketing plan, the strategic plan, the project management plan, etc. Integrated Strategy Model (ISM) combines those 'plans' into one comprehensible, integrated, 1-page model. It focuses on inter-relationships between the different parts of the model - particularly how one part of a plan affects the others
Figure 2. Source: Jean Fahmy
Business and IT Alignment
Business and IT Alignment
Business IT Alignment is a discipline that matches IT strategy with business strategy with the goal of maximizing value created by the enterprise. An IT Strategy is crafted in response to a Business Strategy and sometimes drives changes in business strategy. This IT Strategy Presentation provides a good overview of business IT alignment.
Five Case Model
Five Forces Model
Value Chain Analysis
Business Process Management
Business IT Alignment
- Definition of Business Strategy Business Case Studies
- What does Business Strategy Mean? HBR
- Why Do We Need a Business Strategy Pestle Analysis
- The Three Types of Business Strategies Advantage
- What are the Different Categories of Strategy Business Case Studies
- 3 Approaches to Business Strategy LaSharnda Beckwith, Ph.D.
- What are the key elements of business strategy? Evolve
- Six Steps for Formulating Business Strategy BAS
- Implementing Your Business Strategic Plan Effectively Erica Olsen
- What Are The Benefits Of Having A Business Strategy? Liz Makin
- The Seven Success Factors of Social Business Strategy Brian Solis
- Why it is important to have a strategy for your business Robynne Berg
- Understanding the Integrated Strategy Model Jean Fahmy