The term "business strategy" can be misinterpreted in many different ways. It is often seen as a vague, intangible idea that is hard to define. There are many different definitions of the term, but the most common one is the idea of a company's plan for achieving long-term goals.
So, let's take a generally accepted definition as a starting point for this discussion:
'A business strategy is an outline of the actions and decisions a company plans to take to reach its business goals and objectives.'
At this point, it is also worth pointing out that a lack of strategy can be seriously detrimental to the future of your business for multiple reasons. Market forces are ever-shifting, and the sheer amount of unknown variables can quickly alter the profitability (and viability) of a previously solid business model. In previous years there have been many deep dives into the importance of business strategy, and as shown in research by McKinsey & Company, there is a tendency for a very small number of companies to create the most economic profit. The findings of this research also revealed that a significant number of great companies were able to outperform in what they deemed 'bad industries'—when the average economic profit was less than the market average.
As you can probably guess, the research was coupled with a strong call-to-action to focus on carving out a robust business strategy to increase your likelihood of success.
Whether a business is aware of the need for strategy through common sense, academia, tried-and-tested experience, or insightful consultancy, there is often a tendency to misinterpret what a good strategy really looks like.
Before we address the most common misconception relating to business strategy, let's look at how the topic has affected the job market for further context into the importance of considered strategic thinking:
Parallel to the digital technology boom, new job roles leveraging modern-day tech and thinking have emerged. By quickly scanning any of the major Fortune 500 teams, we find that a particular job title has become not just a norm but a core part of any successful team: Strategists. Whether it's business strategists, marketing strategists, design strategists, research strategists, or even something more niche, the inclusion of such a role reflects its importance in modern-day business.
Unfortunately, we are also in an era whereby job titles have become subject to creative marketing. There are 'creative whizzes', 'technical gurus', and self-proclaimed 'masters' of particular crafts. Such job titles blur the lines of traditional hierarchies and can make it confusing for external clients, recruiters, or customers to truly understand a person's skills and seniority. The relevancy of this train of thought is that many professionals see strategy (or strategist) as a catchy buzzword to add to their existing job title. This mirrors the confusion that many corporations have about what a strategy actually looks like, and to circle back to the aforementioned promise of the biggest misconception:
This is undoubtedly the crossroads that many organizations struggle at.
When organizations don't have a grounded understanding of the art of business strategies, they'll often mistakenly outline simple plans instead. A plan states the steps that the business is going to follow, but a strategy identifies the most advantageous steps to take.
Simply put, a strategy is bigger than a plan as it tackles additional questions and incorporates higher-level thinking.
A strategy should look at all the aforementioned unknown variables that shifting market forces may bring, alongside reacting to existing factors that have shaped the business landscape. There's no single path or set result.
Here's another useful way to look at it:
A plan will involve various identified steps to be taken to reach the intended outcome. You may ask the typical questions of 'When, where, who, what, and how?'— but the most important question is answered via strategy, the 'Why'.
Akin to Simon Sinek's advice to 'Start with Why' when forming a company, it's important to outline your 'why' when determining strategy.
So, in an ideal situation, you'll determine your strategy before then structuring a plan to follow said strategy. This is because your strategy will be the high-level wisdom and ambition that will guide all plans to reach a predetermined advantageous goal.
With our understanding of strategy well defined, we then should focus on what the core foundation of great strategies would be.
It's easy to figure out some of the bigger business aims, such as increased profitability, long-term security, or becoming an industry leader—but to reach such goals, there needs to be a particular focus on key areas.
We believe there are four important pillars to consider when crafting a robust strategy.
Firstly, we should look at our business in comparison to competitors in the market. A well-planned venture will have key product or service differentiators to add unique value for customers. Therefore we should first ask how we can use our competitive advantage to win in the marketplace.
Knowing your current position in the market is useful, as is plotting the space your wish to occupy. When deciding where your brand should be, you should also be conducting a competitor review to determine which areas of the market are saturated or hazardous for your offerings—i.e., Areas of the market that you're unlikely to viably produce long-term wins.
An additional important thought is to ideate on potential disrupting factors that could enter the various market positions you're reviewing. For instance, if you were a large car manufacturer looking to provide affordable 'luxury' cars, you might realize that petrol/gas vehicles could face future scrutiny or restrictions due to environmental campaigns that champion sustainable energy sources. Therefore, your strategy might potentially incorporate a sustainable energy aspect for longevity. With such a consideration, your team would then look to determine whether you can viably compete using such industry technologies and whether you can win against competitors focused on this route.
When discussing your competitive advantage, you should consider your available company assets and portfolio, as well as partner networks, to determine what opportunities you may have that other companies do not. Again, we'll illustrate this line of thought with some tangible examples:
Perhaps you produce a certain type of virtual software. While other competitors may offer the same type of software, you may hold key knowledge and experience in an adjacent market that could be incorporated into your build. A previous example of this would be the development of smartphones, combining other popular items such as cameras, wallets, and portable gaming consoles, with their mobile telephone product. By entering these adjacent markets, the smartphones became increasingly desirable with massive feasible longevity for their innovative multi-product.
On the other side of that example, portable gaming consoles such as the Nintendo Gameboy or Sony PSP suddenly had their market position challenged by the innovative phone companies disrupting their business model. Had the gaming companies identified such a competitive risk early enough, they may have determined a viable strategy to compete against new competition, such as gaining exclusivity with top game developers or developing game expansion apps to play on smartphones—which would aim to embrace the competition rather than clash against it.
The next area of strategy follows nicely from competitor reviews and differentiation advantages: focusing on the market.
After defining where your product or service could win, you should then look at the market to determine whether there are viable long-term profitability and growth opportunities. A key consideration here is the feasible speed of your growth, as slow-growth opportunities could cripple your free cash flow and potentially kill your company before you're able to reach your desired goals. It's well known that most new companies are expected to make a loss for their first two years, and starting with a baseline of a loss undoubtedly fosters increased risk and urgency.
By focusing on your strategy through a market-based lens, your company will seek to identify the potential growth opportunities already existing and any future-based considerations that could help your company win—such as what emerging technologies could enhance your operations or product/service offerings.
One main factor to consider is how much data is available for you to access. By being able to intelligently quantify or validate market trends and shifts, your strategy can be developed with rational justification. However, as a general note, it must be said that even the soundest logic and rationale can still be disrupted by unknown variables—the Covid-19 pandemic being an obvious example of a huge disruptor most strategies couldn't have foreseen.
An example of how the market-lens might identify opportunity is the difference between brick-and-mortar stores and virtual hubs. An online store may experience fantastic growth in certain localities, yet not all nations embrace online shopping. Based on cultural differences, it may be the case that brick-and-mortar stores possess much stronger long-term advantages for a company's success. A typical example of this thinking shows that people are much more likely to make large purchases in person, at a store, whereas online purchases of lower-cost items can gain a higher volume of sales virtually.
This kind of analysis of where, when, and how to market your products or services can be factored into your strategy to fuel higher potential growth in the right channels, at the right times.
Next, we should move neatly on to a broader financial discussion.
Many teams prefer to start with a financial lens purely as income and capital tend to dominate most decision-making processes. Businesses need some form of funding to pay team members, produce products and services, and cover expenses, so it's fairly easy to see why this section is so important to strategic considerations.
In 2018, Chris Bradley (a senior partner at McKinsey & Company) argued that the common method of developing a strategy is wrong. The common method he states is by starting bottom up: "compile all the facts you can gather about your specific situation, then synthesize them into tailored recommendations."
His reasoning is that there isn't enough outside perspective, and given the changeability of markets, it's more than likely that unknown variables will affect your plans eventually. He also argues that if you approach research without an external view of your strategy, you'll just gain an increased bias in your own assumptions and therefore veer off-course from long-term viable solutions.
An example of such bias is evident in Daniel Kahneman's book 'Thinking, Fast and Slow'. The author discusses his own experience of internal bias when designing textbooks for the Israeli Ministry of Education. He started his project by asking his team members how long they thought the project would take to complete, with the outcome being between 1.5 and 2.5 years. Then, he posed a follow-up question of what is the typical outcome that similar teams have had when developing curriculums from scratch. The second question was more akin to their project outcome, with other teams taking 7 to 10 years to finish (and even 40% of teams failing to finish)—Kahneman's team took 8 years.
The bias his team held was based on them focusing on their own experiences. The team had made assumptions and found data to back up their own views rather than looking objectively at their project. In the end, there were coordination issues with bureaucracies, team illnesses to deal with, and even divorces that slowed down progress. Perhaps if his team had factored in more potential disruptions into their project strategy, they could have built-in contingency plans to speed up their process and output.
Circling back to financial considerations, it's imperative to therefore develop an objective baseline so that long-term targets can be assessed feasibly.
We need to estimate what performance levels must be achieved in the future to justify the current value. We can couple our strategy with key performance indicators to help us track success over time. A business might aim to have shareholder returns roughly equalling the cost of equity so that investors are compensated for their opportunity cost of capital. Yet, to create value, companies must obviously deliver higher returns than exceed their capital costs.
To avoid internal bias, it is useful to assess similar peers/competitors that occupy market sectors akin to your offerings. By making such an assessment, more thoughtful long-term planning can be made to map out profitable directions your company can work towards.
Optimism is not a viable foundation for strategy—rather, well-rounded strategy should be the foundation for optimism. In reality, companies have less than a 10% chance of jumping out from the crowd to the top percentile of top performing companies, and the top performing companies tend to capture nearly 90 percent of the economic profit created in their relative sector. This is an important truth of economic profit that businesses need to be aware of: The global distribution of economic profit is radically uneven.
Another hard truth to be aware of is that market forces tend to be one of the biggest factors stopping a company from developing their profits, i.e., saturated competition in the middle of the market fights with each other while the industry leaders continue to soar. This is why we structured these sections with differentiation/competition as the primary consideration. If you haven't differentiated enough, you may end up as a 'middle-market' company, and as the odds of jumping to the top are less than 10%, your strategy, therefore, is competing with 90+% of other strategies—meaning it needs to be robust.
But despite the financially competitive pessimism potentially caused by the discussed statistics, we truly believe that your advantage may come from the widely underdeveloped strategies of competitors. Your aim is to develop an objective baseline for performance that your team can use to conduct unbiased assessments for prioritizing decision-making—in other words, determining which decisions can make the most positive financial impact on your organization.
Take into account the assumption that remaining in a steady state is common for the majority of companies, and then ask what your company would need to achieve better returns. It is useful to visualize your trajectory with a financial dashboard showing your goals, current path, and even closest competitor trajectories (should the latter data be available to you).
Finally, we move on to the fourth core section of great strategy.
Your team should have asked three main questions so far:
Through differentiation: 'What does it take to win in our identified markets?'
Through market: 'Are we within profitable markets that offer long-term growth?'
And through finance: 'What do we need to create value in our business?'
Our last stage will add a feasible assessment of your company to ensure that you can deliver on the necessary steps for success. Your operations incorporate available talent, experience, assets, and general performance management.
An overly typical strategy mistake comes with maintaining the status quo. Teams may huddle into their respective strategy or war room and aim to map out how their current setup can achieve their best output; while this is sensible, it is perhaps shortsighted. Great strategy isn't limited to your current situation but includes a visionary aspect that incorporates bringing in the right factors to actualize your vision.
This is why—when devising strategy—the question 'Can we do this?' should be rephrased to 'What would we need to be able to do this?'
There may be a consensus that the proposed strategy is too lofty but more likely, your team will find the answer may lie within redirecting your focus and altering your available talent and assets.
Consider the big fish analogy. A business may conquer their local markets and decide they want to compete globally or in neighboring geographical territories. One of the common hurdles such a business will face is their knowledge of newly selected markets due to their lack of active team members within new territories. New geographical areas might require established networks (or networkers), known talent that has rooted knowledge of the culture and trends of their area, and a strong company representative (both a brick-and-mortar office space and a capable team member). Note: The rise in virtual business since the pandemic challenged operational norms has shown that it is possible to bypass such challenges, but it doesn't mean the challenges shouldn't be considered in full.
Another operational consideration may be time management. Perhaps certain departments bolster the companies profitably, whereas other departments tend to offer no obvious competitive advantage. We're reminded of our 'Minimum Viable Product (MVP)' approach here. The MVP is a version of a product able to meet demands and perform to a minimum standard of acceptance. The advantage of using the MVP approach is that you gain focus in the right areas, therefore allocating resources appropriately to increase output speed and quality. So, taking this concept to a broader business strategy sense, we could streamline our strategy to point resources towards the most advantageous talent, aims, and general operations that will help us reach our goals.
As an internal example here at Mäd, through continuous business evaluation, we determined our strongest service lines based on talent, marketplace competition, and profitability. We then streamlined our offerings to ensure we could carve our niche in the market and align our focus to our best potential output. This gave us a strategic advantage to leverage our experience and grow competitively in an underserved space.
To summarize the discussion, we find it useful to reiterate that strategy is a combination of important considerations to determine long-term goals. Plans will be made to react to changing market trends and variables, but with consideration to how they can continuously steer towards the determined business strategy.
Companies should be looking at more than how to quickly make short-term gains, and recalibrate towards a diligent path to lasting success. Short-term gains can often take a company off-track and eventually confuse its values, mission, essence, and audience.
By constructing a robust strategy based on four main lenses (Differentiation, The Market, Financial, and Operations), a company can effectively build its road map for smarter decision-making and investment toward a prosperous future.
Whilst we always prefer to lead with high-level discussion, there's merit in following the topic through relatable and clear examples. After considering the formation of robust strategies, it may help to illustrate exactly what this line of thinking would result in.
Earlier, we discussed turning our attention away from immediate gains and focusing on the long-term, but what might that entail? One of the most classic examples of this decision-making lies within the marketing and advertising department(s) within an organization. From an operational and financial standpoint, a firm could free up a lot of free-cash-flow and redistribute funding by simply cutting marketing or advertising services from their structure. In the immediate, the saved resources may turn a potential loss into a profit or allow the team to reinvest in more professionals that create or aid the brand's products or services directly.
However, as time passes, the short wins posed by such an immediate plan may cause the business to suffer. Without marketing structures and operations steering the company in a certain direction, the brand reputation, impact, and reach may falter, putting the organization in a difficult situation whereby the cost of rebuilding these departments (and training new team members) is ultimately much more costly than having to let the original team go. Advertising can also tend to be a long-term investment, as influencing decisions can be a slower process, with wins coming long after the potential customer first discovered the brand through an advertisement.
Of course, leaders will have to make tough decisions like in the above example. And although business decisions are not as absolute as our all-or-none musing, there are certainly strategic considerations that can help guide potentially tough choices between today's finances and the future of the company.
Moving on to actionable strategy steps, we could muse at least six important stages in the strategy-building process after the team has keen awareness of the core foundations of successful strategies.
Stage one is to have vision. In line with our discussion, it is important to look to the future. A strategy is not focused on a single decision but rather on a future outcome and overall higher goal. Next, the second stage is to look inward to your brand or company and ensure you're incorporating the core values of the company in your strategic decision-making process—this simply ensures that your strategy is aligned with your brand essence.
The third stage relates to the important research phase, by which it is suggested you become hyper-aware of your strengths and weaknesses, alongside potential opportunities and threats. This is typically done via SWOT analysis, one of the most well-known analysis tools in business. Following on from this, teams will typically find ways to maximize efficiency through tactical plans in streamlining operations. This is a key part of reaching overall strategic goals eloquently. Tactics can be thought of as blueprints for organizing plans that will keep operations in line with the overall goal.
Next, step five is to ensure your resources are allocated appropriately to meet the financial needs, operational requirements, and competitive aims of your strategy. This includes assigning responsibilities to various team members to assure accountability and harmony on who will be acting, to make the strategy a lasting, consistent success.
Finally, it is important to create some form of measurement structure. By this, we mean that it is vital to be able to track your company's output—otherwise, it is very difficult to know if your plans are on track to achieving the overall business strategy.
Strategies should be bespoke to your business, but it's certainly helpful to have some guiding examples of conclusions teams may typically thrive towards. Having a vague strategy such as 'sell more products' offers no real actionable steps to achieve the goal, or worse, it could besmirch the profit margins if team members abandon typical pricing structures simply to ensure the maximum units are shipped. More likely, a team will produce thoughtful aims such as:
Thought leaders are determined by their market and peers. Yet, by defining thought-leadership as an aim, a business can structure decision-making with the considered sanity-checking question of 'does this action help us on the road to becoming a thought-leader?'
Typical tactics to reach this aim may include increasing human resourcing funds to be able to source and attract top talent. Secondly, commandeering a strong, well-known smorgasbord of copywriters could aid the business's communications output, helping public perception.
There could be some counter-intuitive moments whereby the business realizes that a quick profit from a certain new product or service may actually impair their influence or status in a market. As an example, if a company championing an environmental ethos were to partner with a company that is known to have no regard for sustainability, the first company could be perceived as tone-deaf and have its market position weakened.
Often research may present an opportunity to dominate a particular market defined by the age of the consumers. There can be a variety of key variables that influence how certain consumers behave and think, and businesses can operationalize tactics that help achieve a strategy to reach the right people in the right way.
With such an aim, multiple aspects of the business can be considered, such as what the branding represents: How it looks, how the brand voice sounds, and how the actions of the brand represent the brand values.
Price Point may change based on the target market. For example, young consumers may be more price conscious due to less disposable income, whereas older generations may equate high prices with high quality and seek the best. Even operational factors may come into play, with Generation Z particularly interested in accountability and transparency, and more likely to research the backstory of a brand before they make a purchase.
Rather than focusing purely on higher sales or higher market share, a business may look higher. By aiming to adopt the latest and greatest available tech and having a commitment to constant upgrading and learning, a business can leverage the rewards that come from this technological advantage.
To achieve this aim, businesses will likely invest further in research and development or even acquire promising startups within the tech sphere to acquire employees with unique skills. By pioneering new technologies, a business may therefore produce results that competitors are simply unable to match in either speed, quality, features, or all three.
As a final example of strategic aims, a team may define exactly how they plan to grow. One idea would be to focus on customer retention and loyalty. By creating a brand that customers are fiercely loyal to, they may enjoy higher referral rates and allow new products or services to reach a high audience of interested previous customers.
This strategy would involve many interesting discussions throughout day-to-day decision-making as the best decision for loyalty is not always the most intuitive business decision. Often the needs of the customer differ from the idea of the manufacturer, as such a high level of qualitative research will help keep fanbases engaged with the brand. Secondly, active social media channels will empower loyal customers to have their voices heard and give them a chance to interact with key brand developments.
An unfinished strategy is not a strategy. The reason for this is that your strategy is what guides your actions, so without a clearly defined strategy, your actions will become vague, ambiguous, or confused.
Once your strategy is finished, it's important to communicate it to everyone in your organization with brevity. The top-level team needs to live and breathe the strategy into all their decision-making and ensure they know what they need to do and, importantly, why they are doing it. Equally, even the entry-level team members should understand the direction the company is headed and how they can contribute to this success. Strategy is not an overnight journey but a long-term journey that should ideally last at least 3-5 years.
That being said, although you're firmly etching your strategy into the foundation of your company, you should be careful not to chisel it in stone. Having a caveat to be able to revisit and revise a strategy is important as sometimes huge variables can demolish the status quo—again, the pandemic was a great example of how organizations may or may not have had to revisit how they manage operations and what their realistic goals may be. There's certainly an argument that high-level strategy can be made so robust as to outweigh potential complex variables, but having the flexibility to revisit your situation at the right time is a keen advantage.
When your strategy is discovered, tested, and found to be an ideal fit for the company, you should expect to enjoy certain benefits. Having a focused team able to effortlessly align their input to the company's intended output will harmonize with an overall conviction to make an impact in the right way, at the right time, with the right audience.