What is Business Strategy?
Often when entrepreneurs and even more seasoned business owners start or manage businesses they don’t have a clear understanding of the meaning and importance of business strategy. They know about competition, supply and demand, competitive advantage, and other such terms but they don’t have a robust and comprehensive framework for formulating a successful strategy for their business. In short, strategy is a path to a goal; it is the way a business plans to reach its goals, whatever those goals may be. Strategy answers the question ‘what do we need to do given our current external environment and internal capabilities to be able to reach our goal?’ Strategy formulation is a fundamental step in preparing to start a business and strategy monitoring and re-evaluation can be instrumental in the ongoing success of an operating business. Everything else that the business will do in the course of offering its products and services is based on its strategy. For example, if you haven’t identified your target market in your strategy analysis you won’t know to whom and how to market your products or services. Similarly, if you haven’t defined your positioning relative to your competitors you won’t know what price to charge your customers. These are only examples of the questions you will answer when you formulate your business strategy. As can be imagined most businesses inevitably deal with some of these questions on a piecemeal basis. However, a sound process is needed to develop a comprehensive and cohesive strategy.
Some of the basic elements of a comprehensive business strategy analysis are as follows:
- Industry analysis – an examination of your competitors, your buyers’ power, your suppliers’ power, the threat of substitutes for your product or service, and the threat of new entrants into the market.
- SWOT analysis - an examination of your strengths, weaknesses, opportunities and threats.
- Value Proposition – an examination of what is the unique value that you offer your customers.
- Market segmentation, targeting and position – an analysis of the market as a whole and targeting segments of it that you want to serve and how to cater to them.
In addition, the interactions of all of the above elements along with other important strategic considerations is a critical part of formulating a successful strategy.
What we have discussed so far is referred to as Business Strategy – the way a business unit within a firm operates and competes in its market. There is another level of strategy called Corporate Strategy which addresses the optimal structure of firms with more than one business unit and the interactions of the various business units with one another. This branch of strategic analysis deals for example, with a firm’s decisions on vertical integration to become its own upstream supplier of inputs or downstream buyer of outputs. Such a decision would be made by analyzing which alternative would be more efficient economically and involves an understanding of the financials of each scenario.
With the advent of analytics in recent years, data-driven business management has gained steam. When analytics is incorporated into strategy analysis, company data are analyzed to guide decision making. This has the added advantage that strategic decisions are made based on actual business data which greatly improves the usefulness and relevance of the strategies employed by the business. However, the novelty of this method means that relatively few strategy consultants have the expertise and the processes in place to offer it to their clients.
In summary, strategy is a foundation for a business on which all other efforts are built. It guides every other function and operation from sourcing and production to marketing and sales. As such, every business needs to have a clear and well-thought-out strategy that will guide it towards its goals. Developing a successful strategy requires a well-defined framework and strategic thinking, and it is worth the time and effort.