The Foundational Elements of Developing a Business Strategy
The term “strategy” is frequently used to refer to various concepts. In my view, developing a strategy, executing a strategy, and cultivating a strategic mindset are three distinct elements. Each have different definitions, tools, approaches, and most importantly, skill sets. The capabilities and mindset required for each of these elements take years to develop, necessitating continuous learning and evolution through application and experience.
In this blog, I will discuss the foundational elements of developing a business strategy. My goal is to provide you with an understanding of how and where to start if you want to begin or improve your knowledge in strategic business planning. Future blogs will cover the topics of executing a strategy and cultivating a strategic mindset. Please see my On Strategy - Blog’s Roadmap for the 2024 – 2025 timeline of topics.
The Strategic Thinking Institute defines strategy as "the intelligent allocation of resources through a unique system of activities to achieve a goal." The Institute’s definition effectively encapsulates the initial concept of strategy, which emerged from both military and economic theories. Initially, military strategy emphasized understanding the competitive landscape, positioning, and adaptability in a changing environment. Economic strategy, on the other hand, explored how businesses could gain competitive advantage. Modern authors have built upon these foundations to further develop strategic thinking. I find Peter Drucker’s description of strategy particularly insightful: "a set of principles around which to improvise”[1]. This definition conceptualizes strategy as a continuous process of decision-making and adaptation, allowing for flexibility in response to changing environmental factors.
Strategy today is defining the high-level objectives and targets and identifying your “True North”. These objectives guide the lower-level decisions for the organisation. The targets you identify also say a lot about what you are about and who you want to be they are therefore guiding lights for your organizational culture and the environment it fosters. As importantly, it’s essential to understand that strategy does not happen in a vacuum; it needs to be considered within the market and the environment, both present and future, in which it lives.
The challenge in making strategic level decisions, is the ability to get it right and yet maintaining the ability to shift and respond to environmental changes. Making these high-level decisions requires the capability to operate in an environment of ambiguity using data with wide standard deviations and limited accuracy: making assumptions is essential. As stated earlier, the ideal personality with this specific skill set will be the topic of a future blog.
1 Generic Strategies
The first step of a strategy is to identify how you want to compete. There are 10 commonly used strategies. In this blog, we will address Michael Porter’s three generic strategies, September’s blog will address seven additional strategies.
Porter’s three generic strategies are Cost leadership, Differentiation, and Focus.
1.1 Cost Leadership:
Your product[2] is not significantly different to that of your competitor(s) but it is cheaper than anyone else’s.
For this to be achievable and profitable, it requires you to have economies of scale, continuous improvement, lean processes, etc. This strategy is mostly applicable to high-volume products.
It also requires you to have an advantage in terms of your supply chain and/or asset management. Do you own a source for the raw material required to produce the product? Have you developed a process that makes your service yield higher returns or more accurate analysis?
1.2 Differentiation:
Your product is better than anyone else’s on the market.
Also, and this is a part that most organisations forget when analysing their competitive strategy, you can capture additional value due to your uniqueness. This value can come in the form of additional market share, new market segment, and/or higher profit margins.
Do you remember the “Intel Inside” marketing campaign of the 90’s? That is a great example of how Intel differentiated itself from the competition by turning the customer’s attention to the hardware inside their computers. Up until then buying decision was about the software that ran the personal computer. When Intel was done with us, we suddenly cared about the microchip on the inside as well. Here’s a short but a complete read on the “Intel Inside” strategy: Intel's Strategy by Smit Joshi
1.3 Focus:
This is when you use your low-cost product OR your differentiated product and attack a specific market segment hence focusing on that segment. So, you will have 2 types of focus strategies:
Cost Focus Strategy
Differentiation Focus Strategy
A good example of focused product strategy are the low-cost airlines who offer a low-cost “no frills” experience (the product) to the cost-conscious traveller (market).
2 Analysis
The first important factor to understand is the field that you are competing in – this is your external analysis. Then, once you’ve understood your environment, you need to assess if you have what is needed to play and to win. This is your internal analysis.
2.1 External Analysis
this will help you understand the market’s attractiveness and your ability to compete in it, i.e., your ability to be profitable in this specific market today and in the future.
(Michael) Porter’s Five Forces model will help you assess your market’s attractiveness. The analysis looks at the following five competing forces:
The power of the buyer: this sheds light on the market you are selling into.
Is it composed of a few, key buyers or are your buyers many; be it few or many, are they centralised or are they spread out across multiple regions?
If you have a few key buyers, what will be the impact on your business should you lose one? What will be the impact on your operations should you gain a new one?
If your buyers are many, how can you maintain your sales channel over time? Is it worth having that many buyers and what is their impact on your operations?
The power of the supplier: now swing the power of the buyer on the other side of the equation and ask yourself how dependent are you on your suppliers?
Do any of your key suppliers have a monopoly over your raw materials or the market you are playing in?
How does this monopoly impact your cost? Your material availability? Your power to negotiate?
Competitive rivalry: this is your analysis of who is competing with you in your market.
Who are these competitors?
How does their product stack up against yours?
What do you bring to the game that they do not – your unique selling point?
Do you have a monopoly over a raw material, a product, a market segment?
The threat of new entry: you now need to look at the future and assess how difficult or how easy would it be to face new competitors.
Are you in a market where the cost of entry is so high that the probability of a newcomer is low? Ex. An industry requiring a high capital cost or restrictive regulatory requirements.
Are you playing in a deregulated and low cost of entry market? Ex. The consulting or the executive coaching market.
The threat of substitution: can your product be swapped for another one.
Is it easy for your customer to replace your product?
A cost focused strategy is one that exposes you to a high risk of being substituted. Can your buyer find a similar product at lower cost without giving up any of the features?
If you do not rigorously research your competitors and the features of their products, you run the risk of creating a huge blind spot in this force.
2.2 Internal Analysis
Now that we have looked at the outside world, we turn our eyes inward and analyse our internal capabilities and environment. This will allow us to determine if we can win at the game we want to play and, on the field (the market) we are playing on.
Regardless of the tool you choose to use (SWOT, VRIO, Core Competencies Analysis, etc.), this is the time to show tough love and really take a profound look at your organisation. Remember that 80% of us believe that we are better drivers than other drivers! Most working teams that I have been engaged with tend to overestimate their capabilities and underestimate those of the competition. Rely on data and don’t shy away from asking your existing customers and your employees to participate in this assessment – ask them how they rate you on the various elements. Elements such as:
Unique assets that you hold or processes that you have developed/acquired.
Unique resources (financial, capabilities, intellectual property, etc.) that differentiate you from your competitors.
Ways you have failed in the past and the corrective actions you implemented following these failures.
In his No Bullshit Leader podcast “Strategy is simple, don’t over complicate it” Martin Moore argues that you should “forget things like we have the best people. You don’t. You have the same level of average employee as your competitors.” and I agree! Dig deeper, don’t kid yourself and, as Moore states, don’t believe your own bullshit – his word, not mine :)
3 Final Words and Advice
I will leave you with a few pointers to keep in mind:
Developing a strategy, executing a strategy, and cultivating a strategic mindset are three distinct elements with different definitions, tools, approaches, and skill sets.
Developing a strategy is a continuous process of decision-making and adaptation and it needs to be considered within the environments (external and internal) in which it lives.
Developing a business strategy is a fine balance between skill, capability and data.
Don’t develop a strategy in a vacuum: engage your employees, your key opinion leaders and users, include your key suppliers, ask your buyers where you are doing well and where you can be doing better. Strategy is not reserved for the C-Suite alone.
There are commonly ten strategic approaches; this blog looks at Porter’s three generic strategies: Cost Leadership, Differentiation, and Focus.
A thorough analysis of your external environment, using Porter’s Five Forces, is an essential first step. This exercise takes time and research, plan for it – each step requires prework, discussions, debates, and decision-making.
Your environment is in constant flux: adapt to it. Your strategy development lifecycle cannot and should not be married to your financial cycle. Review it and make it evolve regularly – if you’re changing your strategy every 4 months, there’s something wrong but nor should you develop your strategy and set it in stone for a 3-year period without tweaking it to respond to your changing environment. Your True North should be fixed, how you get to it needs to be adaptable.
Be paranoid: study your competitors continuously and rigorously. If they are catching up to you, understand why and how. It is OK to change your generic strategy as the market catches up to you. Stay in a creative space.
Developing and working on a strategy is not a sprint, it is not even a marathon; it’s a run that just doesn’t end. You just keep running. Some people run with you for a while, other’s run for a long time. You are just setting up for the continuous run of your life. Just like runners you need skills, training, patience, perseverance, adaptability, and grit. But oh, how satisfying it is to win this monumental feat!
[1] Drucker, P., 1993. Management: Tasks, Responsibilities, Practices. Harper Business; Reprint edition.
[2] Throughout the text, product refers to both products and services.