Business Basics: Developing a Business Strategy
The adoption of the word “strategy” by the business world owes a great deal to its original use by the military and some of the terminology reflects its roots. While people often talk of having, “a strategy to lose weight,” or, “a strategy to deal with a difficult co-worker,”’ in the business world we specifically mean a long-term plan that is focused on the overall mission of the organization and intended to achieve specific objectives.
What is Strategy?
In the section, “Five Ps for Strategy” in the book The Strategy Process, leading management thinker Henry Mintzberg says strategy in a business context can be used in five different ways:
- Strategy is a plan: it provides a roadmap for the organization to get from one place to another.
- Strategy is a pattern in terms of actions that are repeated over time; for example, Apple provides high-end products for brand-conscious consumers and uses a similar formula for each new product launch.
- Strategy is position: for example, a Bugatti Veyron car is positioned in the premium end of the personal motor vehicle market.
- Strategy is a ploy: your strategy might be used to outwit the competition. Starbucks, for example, would saturate a part of a city with coffee shops to drive competitors out of business.
- Strategy is a perspective: it develops from the mission, vision, and values of the organization.
When we talk about a long-term plan for an organization, we focus on “corporate strategy,” such as that used by Amazon to develop the mission of the overall business. Below that is the “business unit strategy” developed by Amazon Go, for example, which is the online retail giant’s physical stores. Finally, a “team strategy” is the lowest level, which ensures the team implements and delivers on the corporate and business unit strategies. For the rest of this article, however, we will focus on the corporate level.
Strategy as a 3-Step Process
While there are a variety of processes recommended by both practicing managers and academics, any strategy—whether business or personal—needs to answer three fundamental questions:
- Where are we now?
- Where do we want to be?
- How do we get there?
This 3-step process is, first, about understanding the current situation of the organization and is often referred to as a “situational analysis.” It is about appraising current resources and strategies to gain a realistic starting point from which to develop a plan: if we don’t know where we are, how will we know where we are going? Second, a business strategy needs to establish an end-point: where do we want the business to be in three or five years’ time? Developing a strategy is about planning for the long-term. By establishing the mission, vision, and values, and developing appropriate objectives, the organization can articulate what success will look like at the end of the strategy timeframe. Objectives are a benchmark for progress, as well as a destination. Lastly, the organization develops the strategy that is appropriate to its current situation and will also enable it to achieve the objectives outlined in the previous step. Michael Porter has commented that there are three types of strategy for a business to follow: cost leadership, niche, or focus.
STEP 1: Where Are We Now?
Usually organizations begin the strategy process with a clean sheet (and even a start-up needs to know what the current marketplace looks like and to identify the developing trends). There are a variety of tools and methods a manager can use to assess the current situation of the organization and this list is not intended to be exhaustive. We could, for example, look at the McKinsey 7S Framework or Porter’s 5-Forces of Competitive Industries models. Ultimately, whatever tools the organization uses, this first step is about understanding the internal, or micro-environment, and the external, or macro-environment, in which it operates. It looks at everything from customers to competitors and to new trends developing in the marketplace.
The Situational Analysis
Three of the most useful tools that form part of the situational analysis are:
- The 3C Analysis
- The PESTEL Analysis
- The SWOT Analysis
- The 3C Analysis
This first tool focuses on the micro-environment and looks at some of the key stakeholders, such as the customers, as well as the internal capabilities of the organization, from which its strengths and weaknesses can be ascertained.
- Company: What resources do we have within the organization? How many staff do we have and what are their skills? What are the processes we are using and how are we performing against current objectives?
- Customers: Who are they? Where are they? How do they like to be communicated with? Are our customers changing? Do we need to look to new customer groups, whether at home or overseas?
- Competitors: How are we performing in relation to the competition? Are they bringing out new products? Do we need to respond to what others are doing in the industry?
- The PESTEL Analysis
The PESTEL Analysis has several different variants; you will often see it written as PEST, PESTLE, and even STEPS, but they all serve the same purpose in terms of analyzing the macro-environment, or the wider business environment, in which the organization operates:
Political – What is the political situation facing the organization? Could a change of government see a higher tax on one of our most popular products? The trade disagreements of the current administration saw U.S. farmers hit by tariffs in overseas markets that then required a sizeable bailout from the government.
Economic – The fluctuations of the economic cycle can cause problems for a business. Many banks, for example, were adversely affected by the Credit Crunch of 2007, which saw the closure or merger of several financial institutions and had a negative impact on businesses beyond the financial sector.
Social – Changes in society can influence spending patterns and consumer behavior. The different outlook of the burgeoning demographic cohorts of millennials and Generation-Z have driven demand for products and services that cater to different tastes and attitudes.
Technological – Technology changes at a breathtaking pace and many organizations are caught out by new technologies that challenge old way of doing things. Before the advent of the internet, for example, it would have been impossible to have imagined the creation of businesses like Google or Amazon. Amazon transformed several traditional industries, from books to consumer goods.
Environmental – Businesses need to be conscious of a growing awareness of environmental issues among consumers. In the face of consumer pressure regarding the environmental impact of single-use straws, many food service organizations withdrew them and tried to offer more sustainable alternatives instead.
Legal – Changes in the law can redraw entire industries or require significant change to practices and processes. Changes to emissions regulations, for example, caused vehicle manufacturers to make significant modifications to their products.
- The SWOT Analysis
Used well, a SWOT Analysis is the culmination of the situational analysis process because it encourages managers to evaluate the internal strengths and weaknesses of the organization in terms of the micro-environment and then match them to opportunities and threats in the wider business environment. That could be a matching strategy, where a business matches its strengths to a market opportunity, such as Amazon leveraging its logistics skills in new areas, or a conversion strategy in which the organization converts weakness to strengths. As part of the business strategy process, the development of a SWOT should not be a one-off; rather it must be a task that is completed on a regular basis to ensure the organization is not caught off-guard by changes in its environment. Often dismissed as simplistic, the SWOT actually provides a powerful aid to decision-making and enables the capabilities to be matched to the opportunities and threats facing the organization.
To read more about the SWOT analysis, check out Business Basics: What Is a SWOT Analysis? [https://life.excelsior.edu/business-basics-using-a-swot-analysis/]
STEP 2: Where do We Want to Be?
When the organization has completed the Situational Analysis, the management team needs to decide where the organization is heading. The result of that process is the development of a set of corporate objectives. These objectives articulate the overall mission and vision of the organization, which are broader goals about the direction of travel. Microsoft, for example, had an original mission, which was, ”a computer on every desk and in every home.” Below that mission was a set of corporate objectives designed to help achieve it. There were objectives for both personal computers and business computers, but, unlike the mission, the objectives usually conform to the acronym SMART:
- Specific – The objective should focus upon something specific, rather than a general goal. The objective might specify personal home computers, for example.
- Measurable – There’s an old adage in business that says, “what gets measured, gets managed.” Thus, a measurable objective allows us to know when we have achieved success or how far we are away from achieving it.
- Achievable – Setting an objective to double the amount of sales in a year, for example, may be unrealistic and so an achievable goal should consider the capabilities of the organization to reach it.
- Realistic – This is linked to the previous element, but realistic goals should have the buy-in and the support of all the important stakeholders.
- Time-bound – A SMART objective needs to provide a period of time in which it should be achieved. That time period should also be achievable and realistic in relation to what is required.
A SMART corporate objective might be: “To increase sales of the new Model X smartphone by 50 percent by the first quarter of 2020 in the North American market.”
STEP 3: How Do We Get There?
In the final step, the organization develops the strategy appropriate to the environment in which the organization operates and will enable it to achieve both its mission and stated objectives Porter has identified two forms of competitive advantage for any business: low-cost or differentiation. Either you can sell at a considerable cost advantage to your competitors in the industry, or you have a product offering that is significantly different from what is available from other players. From these two forms of competitive advantage, Porter identified three generic strategies in his book, “Competitive Advantage”
- Cost Leadership – The organization has a cost advantage, perhaps because it can buy more cheaply than the competition, or because it has access to resources that other competitors don’t have. Walmart has a considerable cost advantage because of the scale at which it can buy stock, which means it achieves sizable discounts unavailable to smaller competitors.
- Differentiation – Focusing upon specific attributes, the organization positions itself accordingly. Apple, for example, differentiates itself in terms of its design and brand. For Apple aficionados, only an Apple will do!
- Focus – Here the organization selects a specific segment of the market. It has two choices: either to have a cost focus and use its cost advantage to a specific segment, or differentiation focus and differentiate to that segment. Bugatti, for example, segment its differentiated product to the super-rich sportscar driver, knowing this market segment is small, while enjoying high profits from being so focused.
Developing a business strategy is about understanding the context in which the organization is operating and then developing objectives for where the business wants to be, before establishing the long-term plans to achieve those aims. Successful businesses like Amazon and Google research their situation on an ongoing basis and keep changing their objectives accordingly, and then pursue a strategy that enables them to fulfil their mission.
Whether the organization is a corporation or a non-profit, this business strategy process helps the organization to develop an effective strategy that should help it leverage internal capabilities to external realities. Developing a business strategy, however, should never be a one-time thing and many of the steps outlined here should be kept under constant review in a world that is ever-changing and uncertain. If you are interested in business, check out our Business Degrees.