Wednesday, 14 December 2011

Business Strategy Explained

I recently handed in a final report for my strategy class that I took this term.  Strategic Management is a huge topic, and an interesting one. Strategy or the lack thereof often means the difference between success and mediocrity in business, or at worst, the difference between success and failure.  Nevertheless, many people, even senior business executives, often have only a vague understanding of what strategy is.

When strategies aren't strategies at all

There are many ways of describing business functions, commitments, and aspirations.  A company has goals and revenue targets that they want to achieve.  They have missions that they are created to do and visions they want to see realized.  They have tactics which are the specific ways they enact their strategies.  And also they have corporate and business level strategies.  It is surprising how often these terms are misused, and as a result the company lacks clear, effective strategy. But then, this is why consultants get paid lots of money.

The Quiz

Just for fun I've done a web search for the phrase "Our business strategy is" to see how well companies understand these concepts.  What follows are a few of my results.  Can you tell which ones are strategies and which are not?  I'll put the answers at the bottom of this post.

  1. Seadrill: Our business strategy is to focus our company on modern state-of-the-art offshore drilling units with our main focus on deepwater operations.
  2. Colgate: We strive to leverage our full solution provider approach and advance the digitization of the dental value chain.
  3. SAP: Our growth strategy is to reinforce and strengthen our position as the market leader.
  4. South American Silver: As a growth-focused exploration and development company, our business strategy is to combine three key business elements to drive superior shareholder returns
  5. Shell: Shell is a global energy company that helps power and sustain people’s lives. As we enter a new period of growth, we are sharpening our business performance and stepping up our delivery.
  6. Redevco: It is our long-term strategy to invest in high-quality retail schemes in major European cities and in Asia, aiming to create value for all our stakeholders.
  7. Triforce Global Solutions: Our business strategy is to provide you single source support for your critical enterprise solutions in financials and operations.

Here's a hint for you.  Only one of them has a strategy and one more is a maybe.

I was actually quite surprised by these results.  These are not small companies!  These companies are listing missions, tactics and even goals as strategies. If strategy is a source of confusion for large companies, I imagine it must be even more of an issue for smaller businesses.

What constitutes a strategy?

The definition of strategy is
A set of commitments and actions designed to make the best use of what the firm's core competency in order to give it competitive advantage.  
In layman's terms, this means that a strategy is a set of specific decisions about how the organization will operate so that it makes best use of its strengths to get higher returns than the competitors.  The kinds of commitments and actions concerned fall under two overarching categories: corporate-level and business-level strategies.

Corporate Level Strategy

If you have more than one product that you're selling in more than one market, that means you have more than one business.  If you have more than one business that are owned by the same legal entity, then it is a corporation.  Multiple businesses within a corporation are referred to as business units.

Corporations have corporate-level strategies.  The commitments and actions that concern corporate level strategy are:
  • In what industry/industries should we compete?
  • In what geographies should we compete?
  • How should our business units be organized?
  • What resources and capabilities should our businesses share?
Deciding to be a mining company in Canada is a corporate-level strategy.  Owning a TV network and then diversifying by buying another TV network and having them advertise each other is a corporate-level strategy.  Making 15% more profit than last year is NOT a corporate level strategy.

Business Level Strategy

A business or business unit has to make decisions about how they are going to reach their customers to get above average returns.  There are three main business-level strategies:
  • Low cost

    This is what it sounds like.  Everything in the company is geared to reducing costs.  Wall-mart is a classic example of this.  They have enormous buying power and state-of-the-art inventory systems which work together to keep costs at a minimum.
  • Differentiation

    This means that the company provides additional services that customers are willing to pay for, and charges a higher price.  It does not necessarily mean higher quality goods or services.  An example of this would be Starbuck's, where they are able to charge $3.50 for a cup of coffee because there's an array of extra services that come with the coffee that people are willing to pay for: knowledgable barristas, trendy music, a hip ambiance, etc.  
  • Integrated

    The company is able to charge a higher price because of it's additional services, but has a lower cost of doing business.  This is often very difficult to do effectively.
In addition, business level strategy is concerned with who the customers are.  There are two ways of choosing your target customers:

  • Focused Target

The company is trying to sell to one or two specific types of customer that fit a certain profile.  Walt Disney World Resorts, for example, targets families with children.  Starbucks targets the 20-40 year old yuppies.  

  • Broad Target

The company is trying to sell to everyone.  Gas stations, salt shakers, computer operating systems, generic drug companies, mail boxes...  Things that everyone wants or needs. 

To Sum Up

As you can see, strategic management has very clear guidelines.  This is to prevent confusion between goals, tactics, and strategies. The following are business strategies:
  • "our company has a focused cost-leadership strategy, aiming to serve single mothers" 
  • "our strategy has a broad target and we differentiate ourselves from the competition by letting the customer customize the product" 
  • "our business has an integrated strategy, set on keeping our costs lower than our competitors while charging a premium for our services.  Our target customer focus are clients who live in their parents' basement"
The following is not an effective business strategy:

Strategy for Small Businesses

A clearly defined strategy is a boon for any business, and is rare among small businesses.

Many small businesses are not able to compete on price.  Firms that follow a cost-leadership strategy will do things like build enormous factories to take advantage of economies of scale, or install multi-million dollar Just-in-time inventory systems to make their warehouses run efficiently.  Mom-and-pop businesses have trouble selling the volume needed to support a low-cost strategy.

For this reason smaller businesses often do better with a differentiation strategy.   In this strategy it is important is that a differentiated firm not yield to temptation to compete on price.  By instead finding what services the customers are willing to pay for and offering those, a small business can carve out a customer base for itself.  Offering personalized service, customized products and services, and bundles of services can make a small business successful even if their prices are by necessity higher than the larger competitors.

Answers to Strategy Quiz

  1. Tactic, although you could make the argument that focusing on deepwater operations is a corporate-level strategy, provided you argue that deepwater drilling is its own industry.
  2. Tactic
  3. Goal
  4. Tactic
  5. Corporate-level Strategy (they compete globally in the energy industry)
  6. Tactic
  7. Mission


Unknown said...
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Strategic Leadership said...

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Business Strategy

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