Businesses worldwide sell goods and services in competitive markets that require them to increase the value for owners and shareholders to secure their future existence. This calls for a plan that helps managers guide their decisions and use resources effectively to achieve key objectives. This plan is also known as a business strategy.
This article will cover:
- What a business strategy is
- The difference between strategy and tactics
- Levels of business strategies
- Corporate level strategies
- Business level strategies
- Functional level strategies
- Why having a business strategy is important
- How to formulate a business strategy
- Step 1: Define your vision
- Step 2: Set your top-level objectives
- Step 3: Analyse your business and the market
- Step 4: Define how to gain competitive advantage
- Step 5: Build a strategy framework
What is a business strategy?
The definition is as straightforward as it can be confusing when reading it first:
A business strategy outlines the plan of action to achieve the vision and set objectives of an organization and guides the decision-making processes to improve the company’s financial stability in a competing market. In an attempt to reduce complexity, many online sources refer to a simpler definition of strategy as: A high-level plan that helps a business achieve its goals. While this is still accurate, it does not give a good understanding of how these goals are actually achieved. To allow for a better and more granular understanding, I will refer to the former definition in the following chapters.
How is strategy different from tactics?
Before we get into the details of building a strategy, it is vital to understand how a strategy differs from a tactic. While both terms are often interchangeably confused, they are two entirely different things: A strategy refers to an organization’s long-term goals and how it plans to reach them. In other words, it shows the path to achieve the defined vision. A tactic refers to the specific actions taken to reach the set goals in line with the strategy. For example, company A’s strategy might be to become the cheapest provider in the smartphone market. Their managers then need to negotiate with suppliers to reduce the costs of the electronic components used in production. This is a tactic to achieve the set strategy.
Levels of business strategies
There are three levels at which strategies are typically used: The corporate, business and functional level. All three levels form the strategic framework of an organization:
1. Corporate Level: Corporate level strategies are the strategic plans of an organisation’s top management. They form the mission and vision statement and have a fundamental impact on the firm’s long-term performance. They guide decisions around growth, acquisitions, diversification and investments.
2. Business Level: Business level strategies integrate into the corporate vision, but with a focus on a specific business. At this level, the vision and objectives are turned into concrete strategies that inform how a business is going to compete in the market.
3. Functional Level: Functional level strategies are designed to answer how functional departments like Marketing, HR or R&D can support the defined business and corporate strategies of an organization. It’s not uncommon for a firm to have multiple strategies at each level. In fact, this is essential to ensure that the different needs of each layer are accurately reflected. Although multiple strategies carry the risk of conflicting priorities and objectives, these risks can be reduced if managed correctly. We will come back to this point in a second.
Why is having a business strategy important?
The existence of a strategy is a critical success factor for any business. Essentially, it reflects the strengths and weaknesses of the company and answers how the company plans to respond to the threats and opportunities in the market in which it operates.
A strategy takes into account the resources at hand and how to best deploy them to achieve its set objectives. That’s why a strategy is often called the lighthouse for a company’s management: It aligns the efforts of all functional departments and gives its employees a Northstar that guides their daily decision making. To make this point even clearer, let’s say a business would not have a strategy on how it will compete in a market: The absence of such a blueprint would lead to disordered actions in each department, limiting the organisation’s effectiveness as a whole. This incoherence always results in a loss of competitive power that will be exploited in the market.
Define your vision
Most online sources suggest that strategy formulation should begin by defining the objectives of an organization. But this reaches too far too fast, as it presumes that the offering, the market and the target customers have already been defined. For a strategy to be successful, it must first consider the company’s core values and its desired future position in the market. This is also known as the company’s vision.
Customers
Another vital step in building an effective business strategy is to define the type of customer a company serves. Customers are either categorized as consumers (B2C) or businesses (B2B). Both groups have different criteria, reasons and motivations for purchasing goods and services. Knowing them allows a firm to accurately address their specific needs and wants in its strategy.
Target Market
Finally, strategy builders need to be clear about the market their offering and value proposition are targeting. If a firm sells to consumers (B2C), a market can be defined by demographic and socio-economic factors, such as gender, age, occupation, education, income, wealth and where someone lives.
If, however, the offering targets other businesses (B2B), markets are typically defined by using factors such as the industry, business or sales model of the targeted customer groups.
Set your top-level objectives
After defining the vision, the next step in formulating a business strategy is to set an organization’s top-level objectives. These objectives are usually focused on increasing a firm’s sales and profits, as they ensure its existence and improve the shareholder value if publicly traded. That’s why a strategy essentially aims to answer the question of how a business can compete in the market to grow its revenue, while also improving its financial position. Note that the formulation of high-level objectives does not include any goals to achieve a company’s mission or to reflect its core values. This is because the sole purpose of a generic business strategy is to increase the company’s economic value for its owners or shareholders. The core values and mission are later taken into account when designing the lower-level strategies, such as the marketing or operational strategy.
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