Over time, the business world has proved to be just as wide as the world we live in, with lots to be learned and mastered as time roll by. This article helps in clarifying the basics of business strategy.
What’s the Definition of a Business Strategy?
Business strategy is sometimes defined only as a firm’s high-level plan for reaching specific business objectives. Strategic plans succeed when they lead to business growth, a strong competitive position, and strong financial performance. When the high-level strategy fails, however, the firm must either change its approach or prepare to go out of business.
The brief definition above is accurate but, for practical help, many businesspeople prefer instead a slightly longer explanation:
Business strategy is the firm’s working plan for achieving its vision, prioritizing objectives, competing successfully, and optimizing financial performance with its business model.
The choice of objectives is the heart of the strategy, but a complete approach also describes precisely how the firm plans to meet these objectives.As a result, the strategy explains in practical terms how the firm differentiates itself from competitors, how it earns revenues, and where it earns margins.
Strategies Reflect the Firm’s Strengths, Vulnerabilities, Resources, and Opportunities. And, They also Reflect the Firm’s Competitors and Its Market.
Many different strategies and business models are possible, even for companies in the same industry selling similar products or services. Southwest Airlines (in the US) and Ryan Air (in Europe), for instance, have strategies based on providing low-cost transportation. The approach for Singapore Airlines focuses instead on brand image for luxury and quality service. In competitive industries, each firm formulates a strategy it believes it can exploit.
Formulating Strategy Is All About Meeting Objectives (Goals)
In business, the strategy begins with a focus on the highest level objective in private industry: Increasing owner value. For most companies, in fact, that is the firm’s reason for being. In practical terms, however, firms achieve this objective only by earning profits. For most firms, therefore, the highest goal can be stated by referring to “profits.” The generic business strategy, therefore, aims first to earn, sustain, and grow profits.
An Abundance of Strategies
Strategy discussions are sometimes confusing because most firms, in fact, have manystrategies, not just a single “business strategy.” Analysts sometimes say marketing strategy when they, in fact, mean the firm’s competitive strategy. And, a firm’s financial strategy is something different from its pricing strategy, or operational strategy. The firm’s many strategic plans interact, but they have different objectives and different action plans.
The Strategic Framework
The subject business strategy is easier to understand—to make coherent—by viewing each one as part of a strategic framework.
The strategic framework is a hierarchy. At the top sits the firm’s overall (or generic) business strategy. Here, the aim is the highest-level business objective: earn, sustain, and grow profits. Some may immediately ask: Exactly howdoes the firm achieve it’s profit objectives?
Firms in competitive industries answer the “how” question by explaining how the firm competes. For these firms, therefore, the overall business strategy is rightly called competitive strategy. A “competitive strategy” explains in general terms how the firm differentiates itself from the competition, defines its market, and creates customer demand.
However, detailed and concrete answers to the “how” question lie in lower level strategies, such as the marketing strategy, operational strategy, or financial strategy, The marketing strategy, for instance, might aim to “Achieve leading market share.” Or, “Establish leading brand awareness.” Financial strategy objectives might include: “Maintain sufficient working capital” or “Create a high-leverage capital structure.”
Understanding the Strategic Framework
Indeed, most firms develop and use a rich and complex strategic framework. As a result, business strategy formulations are more explicit when they focus on these points:
- Specific business objectives for each strategy. Identifying which goals in the framework have priority over others.
- Mapping relationships between the various strategies. Showing, for example, which of them support others.
This article, therefore, presents business strategies as components of a strategic framework.