Can you define exactly what constitutes a business strategy? Some people say no, but we believe you can.
In fact, we believe that a valid business strategy consists of five components:
- The current or desired core competencies of your company
- A description of how you will differentiate yourself from competitors
- The industry or industries in which you wish to compete
- The initiatives you want to implement in marketing, operations, information technology, finance and organizational development
- A financial forecast showing how your plans will meet stakeholder needs over the next 3 to 5 years
Let’s look at each of these components.
The first component of a valid corporate strategy is a clear description of the current or aspired core competencies of your company.
You may be thinking, “Great, but what is a ‘core competency’?” While there are many definitions, here’s a good one from Wikipedia:
“Core competency is something a company is good at that meets the following three conditions:
- It offers consumer benefits
- It is not easy for competitors to emulate them
- It can be used for many products and markets.
A core competency can take various forms including technical/professional know-how, a reliable process and/or close relationships with customers and suppliers. It can also include product development or culture, such as B. the engagement of the employees.”
For example, we could say that Southwest Airlines is a reliable airline that offers low fares. However, in order to offer these advantages, it must have certain “core competencies”, important skills that allow it to have low rates and be reliable. We believe Southwest Airlines has four core competencies that it executes so well that it consistently outperforms all other US airlines in terms of profitability.
These core competencies are:
- The lowest operating costs per aircraft
- An economical point-to-point airport network
- A fanatical culture focused on customer service and cost savings
- An ability to keep planes in the air longer than their competitors.
Southwest Airlines could not offer the benefits of low fares and reliable service without mastering these core competencies. What key benefits do you want to offer your customers? What core competencies do you need to master in order to provide them?
The second component of a valid business strategy is a description of how you differentiate yourself from the competition.
In our experience, differentiation is about being the best at something. This should be captured in your mission statement – what are your company’s aspirations and how do you intend to assert yourself against the competition? We were just talking about how Southwest Airlines is different – what are you going to offer customers to make them choose your products or services so you can grow your business?
It takes a lot of hard work to come up with a good answer to this question, and even more work to make that distinction a reality. It’s easy for us to say that Southwest is the best low-cost airline in the US, but it’s exceedingly difficult for them to pull it off.
The third component of a valid business strategy is a description of the industry or industries in which you intend to compete.
You need to be able to define what kind of company you are – are you a furniture manufacturer? A gift card retailer? A consulting company, a stockist, a toy importer, etc.? This step sounds easy, but we find that companies are often so concerned about narrowing their focus that they aren’t really clear on what they want to do. A company with a good business strategy will have thought through these questions and made the difficult decisions needed to clarify its identity. If so, it can easily pass the litmus test of identifying the industry or industries in which it operates.
The fourth component of a business strategy is the set of initiatives you want to implement across marketing, operations, information technology, finance, and organizational development.
These are the plans that will guide your company’s focus and resource allocation over the next few years. If your business strategy is specific enough to be relevant, you have detailed plans in each of those areas.
The fifth component of a business strategy is a financial plan, which forecasts the results you expect your plans to deliver and how they will meet stakeholder needs over the next 3 to 5 years.
Your strategic planning process cannot be separated from your annual budget process. What is not in the budget does not exist in most companies. For this reason, your strategic planning team needs to have a highly experienced finance person, preferably the CFO. During the planning process, your team must create a financial plan that estimates the results of executing your strategy. This plan must be approved by your company’s senior management and board of directors and should be reviewed regularly to track and refine results.
So – these are the five components of a valid business strategy. Good luck in planning your success. And successful because you plan.