Chapter 7: Developing a Business Strategy
Business Strategy, Assessing Strategies, Planning Process, Strategy Challenges
The Concept of Business Strategy
In order for business growth & profitability, senior management must:
- Define & create a strategic direction and market position for the organization – Strategic Plan!
- Execute the core tactical initiatives within the plan in a manner that ensures success – Execute!
1: Strategy Made Simple
What are the 6 Core Elements for Assessing Business Strategy?
Managers must determine direction in these 6 key areas:
- Purpose: Mission of organization & vision of managers.
- Mission statement is organization’s reason for existing.
- Vision statement is what managers want their organization to become.
- Markets: Market business is in.
- Measure success in existing markets & decide if they’re worth competing in.
- Look for new potential markets.
- Harvesting strategies is a decrease in commitment to a market due to its perceived weak profitability.
- Products & Services: Current products & services offered by the organization.
- Reviewing current products/services to see which need to stay or which need research & development.
- Looking at potentially new products/services.
- Seeing changes in demand & supply (due to change in tech, consumer needs/tastes, or new substitutes)
- Ex: Whether customers should be offered payment terms/financing options.
- Resources: Allocation of resources.
- Allocate resources in a way that accommodates for capacity limitations, competency limitations, and technological limitations.
- Business System Configuration: Modifying the organization infrastructure & business process.
- Making changes to distribution outlets, warehousing, product delivery, plants & facilities, manufacturing or assembly processes, marketing campaign, etc.
- Ex: Addition of an ecommerce website.
- Responsibility & Accountability: Identifying who is responsible for each aspect of the plan.
- Who will be responsible for key objectives and what is measuring their success?
- Create an accountability system using SMAC (specific, measurable, actionable & controllable) or SMART (specific, measurable, actionable, realistic & time sensitive). Also detail budget, which customer to target, how staff will be rewarded.
The Strategic Planning Process
This is the process of building a strategic plan or “road map” for an organization’s success.
What are the 5 Steps to Developing a Strategic Plan?
- Revisit Our Purpose: Who are we & where do we want to go? (Mission & Vision statements)
- Do An Internal/External Analysis: What changes threaten us or provide us opportunities?
- Assess Our World View: Based on what we know, what are our choices?
- Choose Direction: Given capabilities, competencies, capacity, competitive advantage & resources, which strategy is the best (where will we play)? What threats must we respond to?
- Implement Strategy: How do we develop strategic thrusts & tactics to successfully execute plan? How do we monitor performance?
What is I/E (Internal/External) Analysis?
This analysis is all about assessing business risk & change in 4 key areas:
- Macroeconomic: PESTEL (Political, Economic, Social, Technological, Environmental, Legal).
- Industry: Porter’s 5 Forces assists us in identifying fundamental changes in the industry.
- Rivalry among existing competitors
- Threat of new entrance (barrier of entry)
- Threat of substitute products or services
- Bargaining power of suppliers
- Bargaining power of buyers
- Competitor: SWOT analysis
- What are the competitor’s strengths?
- What are their weaknesses?
- What market opportunities will they seek to attack?
- What threat do they pose to your organization if they’re successful?
- Reviewing annual competitor reports, quarterly earnings, forward-looking assessments of the future, management comments are all excellent sources of information on competitor strategies & actions.
- Competitor: Types of Competition (Perfect Competition, Monopolistic, Oligopoly or Monopoly)
- Company: 3C Analysis (Competencies, Capabilities & Capacity) & SWOT Analysis
- Full internal analysis of resources, capacity, competencies, and human resources.
- Compare that to competitor 3Cs & SWOTs.
- Identify opportunities that exist for the company.
- Identify financial, operational, technological & market risks that would occur if pursuing an opportunity.
- Customer: Identify shifts taking place in customer base in terms of attitudes, behaviour & needs.
- Demographic changes, customer desires, impact of economic climate, customer expectations, etc.
- Customer analysis will also look for new customers in new markets or with new products/service.
How Can Competitive Advantage Be Identified?
Competitive Advantage can be described as ‘How does this company add more value to the product/service they’re offer? Why would a customer choose them over another?’
2: Potential Areas Where Competitive Advantage Can Be Identified
What are the 2 Types of Competitive Advantages?
- Strategic: “First Mover” actions; changing the game/expectations/norms of a marketplace.
- Operational: Executing daily tasks in a superior manner than competitors, in delivery, customer service, quality, market change flexibility, efficiency, product enhancements/upgrades faster, etc.
After I/E Analysis, management needs to make decisions about which opportunities to pursue & how resources will be allocated to achieve them. These decisions are then formulated into the organization’s strategic plan which has 3 parts:
- Corporate-Level Strategy: What to accomplish & where to compete (which markets).
- Which businesses to compete in, which new businesses to add, which business areas to exit.
- Where the business emphasis should be placed. The Big Picture.
- Business-Level Strategy: How to accomplish & How to compete. Identify objectives.
- Operating Plan: Detailed, immediate-term set of objectives & tactics designed to achieve a specific business initiative.
Fundamentals to Operating Plan Formation
The strategic plan should identify where & how to compete, what competitive advantage to leverage, and define the marketing/operational plans required to execute the plan!
5 Critical Questions to Review When Developing Strategy
- Does the proposed strategy leverage your organization’s resources & capabilities?
- Does the proposed strategy fit with current & future industry/market conditions?
- Are the competencies that will be leveraged suitable for the required period?
- Are the key drivers of the proposed strategy consistent with strategic objective & position?
- Are you able to implement the proposed strategy?
4 Things to Check When Reviewing a Strategic Plan
- The operational activities are properly aligned to achieve the plan’s objectives.
- The budget, and forecast of revenue, is realistic.
- The resources needed for the plan are available or acquirable.
- Benchmarks & performance indicators are established to monitor the plan’s progress.
What is Directional Lock-In?
The level of financial & operational commitment an organization incurs to begin implementing its strategies. Once these commitments are made, the organization is basically “locked in”. These commitments can include spending capital resources on new/upgraded buildings/warehouses/etc, new/upgraded equipment, research & development for new/current products, marketing, distribution, hiring staff, etc.
In order to successfully implement a plan, operations must be efficient, marketing must be effective, staff must be trained, & any issues that arise need to be dealt with properly.
Once the execution phase has started, managers must monitor performance & take corrective action when necessary. They must look at competitor actions & external responses to the plan.
Strategy Challenges in Small/Medium Enterprises (SMEs)
SME managers & owners find themselves acting as the marketing, human resource, operations & financial managers simultaneously. They often don’t have time & resources to effectively plan. But, even for SMEs, it’s crucial to strategize.
Strategic Planning for Not-For-Profit Sector
Not-For-Profit organizations (social organizations) must also strategize. The challenge is balancing the effectiveness of their economic activities (if they provide goods/services for a fee) & their social mission statement. They don’t have shareholders or owners, they have an organized collective (membership base, government entity or community board). Financing comes from philanthropic donations, government allowances/grants, private grants, sales of products, etc.
5 Things That NFPs’ Actions & Economic Activity Must Follow
- Mission Balance: Maintain the balance between effective financing & social mission/goals.
- Vitality: Enhance vitality (ability to grow & sustain its membership/donor base) through maintenance & growth.
- Collective Entrepreneurship: Maintain an atmosphere of collective entrepreneurship (the community & population where the organization is located are involved in the formulation/implementation of the strategy).
- Rootedness: Enhance rootedness by strengthening partnerships & networks that support the mission statement. Interweave the NFP with the surrounding community, organizations, businesses & citizens.
- Operational Effectiveness: Operate effectively to ensure affordability of products to targeted social audience and provide mechanisms for those who are in need but can’t pay.
In Summary, What Makes a Strategy Successful?
A successful strategy:
- Assesses the external environment.
- Defines the changes & opportunities within the market segment the organization can serve.
- Effectively allocates resources & maximizes capabilities to support the production
- Identifies competitive advantages the organization has & leverages them