Business strategy

Often when entrepreneurs speak about business strategies they mention growth, revenue and profit targets. While this is commendable as it serves as a guide for entrepreneurs; these are just goals, plans, targets and not a strategy. 

What is strategy?

A strategy is a set of actions taken by an organisation in pursuit of their long term objectives. As such, strategy is focused on a company’s long term plans- 5years or longer. 

 

So when talking about strategy, ideally, it should read, 'our strategy is (name of strategy). It is about (define what the strategy is about). We will emphasise these actions (state the actions to be pursued). Our expected outputs are (revenue) by (year). Check out DHL’s strategy https://www.dpdhl.com/en/about-us/mission-and-strategy.html

 

The reason most entrepreneurs cannot articulate their strategy is that they have not crafted one. In this installation, we will walk through the crafting of a strategy.

 

Please note: this is not an exhaustive exercise, and the frameworks mentioned here are interchangeable with other frameworks out there.

 

Why strategy?

 

A strategy assists a business to achieve outstanding success by identifying its sources of superior business performance and advancing actions to be taken that exploit these sources of superior performance in a world were turbulence, unpredictability and intense competition will continue to dominate, such as now with the COVID-19 pandemic.

 

The 3 steps to strategy formulation:

 

1. Analysing: 

A good business strategy considers how the company competes in its industry and location. In turn, this requires a good analysis of an organisation’s internal environment as well as the external environment in which the business operates.

 

External environment

Industry dynamics

To understand the industry dynamics and the industry’s ability to sustain profitability, analysis of the external environment is needed. Porter’s 5/6 Forces framework is a great resource to use as it considers:

(1) competitors (incumbents), 

(2) the threat of new entrants (entry and exit barriers), 

(3) customer power (switching costs, market size, etc), 

(4) the threat of substitutes (products/services that can be used in place of yours), 

(5) supplier power (the ability of suppliers to become your competitors and the power suppliers can wield over you in supplying to you), 

(6) complements (products/services that can be paired well with yours).

 

Key success factors (KSF)- Customer

 

For any business to succeed, it needs to understand the KSFs in its industry. The KSFs are gleaned from customers and can range from price, speed, quality, user experience, etc, so it is paramount that whatever product/service offered meets these KSFs.

Internal environment

One must be aware of an organisation's key resources and capabilities to exploit them to grow their business! Strategy formulation helps you dig deep into your organisation and find your strengths and if you have none, pushes you to develop those resources and capabilities.

A useful framework to use in evaluating resources and capabilities is VRIO (Valuable, Rare, Imitability, Organisation) developed by J.B Barney. Testing resources and capabilities- financial, HR, tangible and intangible (knowledge, brand, patents, data)- using this framework will reveal where the competitive advantage lies, and the resources and capabilities that need exploiting for your organisation to generate superior profits. It will also reveal the resources and capabilities with a potential for improvement.

  

2. Choosing: 

After considering your external and internal environments and determining your competitive advantage, it is time to decide how you are going to compete in your chosen domain.

A framework to use for this is Porter’s generic strategy, which posits that a business can either compete in a narrow market (niche) or broad market, and either focus on cost leadership or differentiation, though this has been amended to include an integrated cost leadership and differentiation strategy.

 

3. Implementing: 

When you have decided on the strategic direction to take, it is finally time to implement your strategy. But before you implement, test for congruency between the analysis undertaken and the choices made.

 An easy way to determine if there is congruency is to test the choices for:

Suitability: Does the proposed strategy match the needs identified from the strategic analysis. The strategy should be consistent with the environmental or resource analysis and fit the organisational objectives. 

Feasibility: How well it would work in practice and how difficult might it be to achieve.

Acceptability: How will the various organisational stakeholders feel about the expected outcomes of the strategy – typically in terms of risk, profitability, reward, ethics and the effect on relationships.

If the choices being considered meet these criteria, then go ahead and implement your strategy!

Note of caution: Strategy formulation and implementation is an iterative process, not linear, so you can adjust your strategy as you go along to take into account changes in your environments.