The success of a business is determined by the effectiveness of the strategy it pursues. A strategy sets out how a company intends to compete in a particular market, grow and make a profit.
Companies around the world are selling goods and services in competitive markets, which forces them to increase the value they generate if they want to ensure their future existence. An achievable goal plan helps managers guide their decisions and use resources effectively for key goals. This plan is known as a business strategy.
One of the basic definitions of business strategy is that it determines the direction and purpose of a long-term business.
It also determines how resources are allocated to meet the needs of the market and shareholders.
On the other hand, Michael Porter, author of the famous book “Competitive Advantage”, emphasizes that strategy defines and communicates the unique position of a company in the market. According to him, the strategy determines how the company’s resources, skills, and competencies are combined to create its competitive advantage.
However, the simplest definition of a business strategy is to determine how you will make money in the next period.
Whether you are just starting out or you have a successful business and want to grow it, you need a strategy to set your goals and the path to achieve them, preferably in simple and pragmatic terms. Undoubtedly, you are already thinking about what you want to do and where you want to go, but most of the time that is not enough if you haven’t answered how you can get there. The existence of a strategy is a critical success factor for any business.
In essence, the business strategy reflects the strengths and weaknesses of the company and states how the company is prepared to respond to threats and opportunities in its market. A strategy takes into account the resources at hand and how to best implement them to achieve the marketing goals.
That is why a strategy is often seen as a benchmark for running a company: it aligns the efforts of all departments and provides its employees with a real north to guide them in their daily decision-making.
To make this point even clearer, let’s assume that a company would not have a strategy on how to compete in a market: the absence of such a plan would lead to disorderly actions in each department, limiting the effectiveness of the organization as a whole. This inconsistency always results in a loss of competitiveness that the market competitors will exploit.
Before going into the details of building a strategy, it is vital to understand how a strategy differs from a tactic. Although the terms are often confused, they refer to two completely different issues:
- A strategy refers to the long-term goals of an organization and how it intends to achieve them. In other words, it shows the way to the vision.
- Tactics refer to the specific actions taken to achieve the goals of the strategy.
For example, a company’s strategy may be to become the cheapest provider in the smartphone market. Their management must negotiate with suppliers to reduce the costs of electronic components used in production. This is a tactic to achieve the established strategy.
Or, as English comedian and writer Frank Muir put it: The strategy is to buy a bottle of fine wine when you take someone out to dinner. The tactic is how you get them to drink it.
Defining vision and mission
For a strategy to be successful, it must first take into account the core values of the company and its future position in the market. This is also known as the company’s vision.
To see this in context, here are examples of vision statements from two of the largest companies in the world:
- Apple: “We believe that we are on the face of the earth to make great products and that’s not changing.”
- Amazon: “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”
Stating the vision is an important step in the strategy-building process, as it ensures that the projected strategy reflects the real needs in the relevant market. Based on the vision, the offer, the clients and the market may be defined.
Product/service range and USP (unique value proposition)
An effective business strategy is based directly on the company’s product or service range and USP, or value proposition. The first determines what goods and services are offered, while the USP explains why people should buy them.
Remember that the USP is responsible for why a company exists and how it is different from its rivals. In other words, it explains how a company intends to create demand and compete in the market. To illustrate this with an example, consider Shopify: its value proposition is to offer a single e-commerce platform that allows its customers to sell across multiple channels.
Another vital step in building an effective business strategy is to define the type of customer that the company serves. Customers are either classified as consumers (B2C) or businesses (B2B). Both groups have different criteria and reasons for purchasing goods and services. Knowing them allows a company to accurately address their specific needs and desires within its strategy.
Finally, the strategy must clearly identify the target market of the product/service range and the USP. If a firm sells to consumers (B2C), a market can be defined by demographic and socioeconomic factors, such as gender, age, occupation, education, income, and where people live. However, if the product/service range targets other businesses (B2B), markets are usually defined using factors such as the overall industry or sales model of the target customer groups.
After defining the vision, the next step in formulating a business strategy is to set the macro objectives or goals of a company. These goals are usually focused on increasing sales and profits because these ensure the company’s existence and increase the value of shares if the companies are publicly traded.
Therefore, a strategy aims, in essence, to answer the question of how a company can compete in the market to increase its revenues while improving its financial position.
Keep in mind that the formulation of macro objectives is not related to the company’s mission or its core values. This is because the sole purpose of a generic business strategy is to increase the economic value of the company to its owners or shareholders. Core values and mission are taken into account later on, when designing micro-level strategies, such as a marketing or operational strategy.
Market and competition analysis and setting competitive advantages
The information obtained from the SWOT analysis serves as the basis for formulating a strategy that will consider the internal characteristics of the company and the external situation of the market segment. This information allows decision-makers to ensure that a company takes advantage of market opportunities and strengths while addressing potential weaknesses and threats that may limit its long-term success.
The fourth step in formulating the strategy answers the question of how the goals are achieved.
Companies operating in competitive industries need to define how they want to compete in the marketplace, create demand, and increase sales and margins.
Michael E. Porter, a professor at Harvard Business School, identified three types of generic strategies by which companies can define their competitive advantage:
However, companies may fail to effectively pursue one of these generic strategies. Porter refers to this as being “stuck in the middle.” In this case, a company does not offer a product or service that is unique enough to attract customers. At the same time, the price of the offer is too high to compete effectively in the market. Failure to comply with a competitive advantage will result in poor sales performance, which threatens the future of the company.
Defining the business strategy
Based on the execution of the previous steps, a generic business strategy can be formulated. However, marketing or finance will not effectively contribute to this macro strategy, unless it is translated into specific micro strategies. Building them is called strategic framing. Product, branding, marketing, or operational strategies are just a few examples of micro strategies that contribute to the success of a company’s overall business strategy
Marketing tactics and resource allocation
Many business strategies articulate the operational details of how the workforce should maximize efficiency. People in charge of tactics understand what needs to be done to save time and effort. A business strategy includes details on where to find the resources needed to complete the plan, how to allocate resources, and who is responsible. This way, you will be able to see where you need to allocate more resources to complete your projects.
The corporate level is the highest and most comprehensive level of business strategy. The business plan sets the guidelines for what needs to be accomplished and how the company is going to accomplish it. It also sets the mission, vision, and corporate goals.
Departmental strategy (functional level)
Functional level strategies are established by different departments. These include, but are not limited to marketing, sales, operations, finance, CRM, etc.
Business unit level strategy
The level of business divisions refers to division-specific strategies, which vary for different divisions of the business. A division can refer to different products or channels, which have completely different operations. These divisions develop strategies to differentiate themselves from the competition, using competitive strategies to align their objectives with the overall business objective specified in the corporate strategy.
A price-oriented strategy refers to the ability of a company to make a product at the lowest cost in its industry. This cost advantage can be achieved by using the ability to negotiate volumes, by using cost-effective technologies and patents, or by having the ability to create and maintain cost benefits throughout the supply chain.
A price-oriented strategy requires a company to effectively reduce its cost structures while charging prices for its products in line with the industry average.
Example: The low-cost airline Ryanair is a typical example of a company that applies a pricing strategy. They compete successfully in the airline industry by reducing costs and using volumes. For this reason, Ryanair’s fleet operates only one type of aircraft, the Boeing 737-200.
In a differentiation strategy, a company seeks to create a unique offer that is appreciated by its target customers. Buyers should perceive the offer as adding much more valuable compared to alternatives in the industry. To balance things out, the company charges higher prices for its products.
Exemple: Starbucks is an excellent example of a company that has successfully implemented a differentiation strategy. While selling coffee as a widely available commodity, Starbucks’ well-designed stores and the unparalleled number of coffee flavors are the reason why customers are willing to pay extra.
The niche strategy targets only a small number of market segments. The Porter matrix defines the competitive sphere, in these cases, as narrow, because a company targets only a small part of the larger market segment.
In this case, a company may focus on costs or differentiation:
- When a company is looking to gain a cost advantage, it follows a cost-focused strategy. The company offers a low-cost alternative for the top product on the market, which still attracts a certain group of buyers.
- On the other hand, the niche strategy aims to respond to a specific need in a customer segment. The classic niche marketing strategy that many small and local businesses are pursuing is to compete against the larger chains in their market.
Exemple: Small online stores that specialize in offering vegan and vegetarian products are a good example of companies that follow a niche strategy. Their specific goals allow them to become the preferred choice of ecology-oriented and health-conscious customer segments.
Business strategies are successful when there is a direct correlation between marketing and sales, and financial performance. The success of a strategic plan can be assessed by monitoring a range of key performance indicators (KPIs).
However, it is important to bear in mind that:
- these KPIs measure the level of achievement of the goals defined in step two of building the strategy.
- these KPIs should be defined before the implementation of the strategy takes place to ensure correct measuring.
Normally, most of the key performance indicators below are measured when implementing a new business strategy:
- Sales revenue;
- Number of customers;
- Customer retention rate;
- Customer recurrence rate;
- Conversion rate;
- Average order value (AOV);
- Business volume;
- Competitive position.
- Market position;
- Sales profit rate;
- Brand awareness and media coverage;
- Company margin relative to the industry average;
- Sales increase compared to the industry average.
- High profit;
- Net income;
- Operational profit;
- EBIT and EBITDA;
- Return on assets;
- Free cash flow;
- Operating cash flow.
In practice, companies can measure the success of the strategy more granularly. This is because individual departments define their own strategies based on their own function.
Examples of successful business strategies
Amazon is known for its excellent customer service and fast delivery options. Because its vision is to be the most customer-oriented company in the world, Amazon is making it a reality by constantly improving customer experience in existing and emerging markets. The outcome? Additional growth and higher value for shareholders.
In his first shareholder letter in 1997, Jeff Bezos himself outlined the four principles that guide the company:
- the obsession with serving customers, rather than focusing on competitors;
- the passion for innovation;
- the commitment to operational excellence;
- long-term thinking.
Amazon’s generic strategy is to gain a competitive advantage by reducing costs (cost-based strategy), combined with its ability to innovate in competitive markets. The emphasis is always the same: meeting the needs of end customers.
This allows Amazon to outperform its competition, which often struggles to catch up with the giant. Its micro strategies (operational, marketing, etc.) follow the macro strategy of focusing on a varied offer, price, and volume to create value for customers. This strategic framework has allowed Amazon to become one of the most successful companies of the 21st century.
There are certain industries that you simply don’t mess with, industries such as aeronautics, supermarkets, and banking. In fact, the banking sector is probably the least susceptible to disruption. It takes a lot of capital, a lot of approvals and regulations, not to mention years of building customers’ trust to lend you their most important asset – their money.
Banks are old. Their business models are largely unchanged for hundreds of years and they make huge profits without actually doing a single thing. They are extremely strong and almost impossible to disrupt. But for some crazy reason PayPal – a name that now makes any bank shiver – didn’t seem to care.
- PayPal spends less on technology than a medium-sized bank. However, its technology platform is far superior.
- Consumers trust PayPal as much, if not more, than they trust their bank. Even though PayPal has only been on the market for a short while.
- When customers make a purchase using their PayPal account, the bank has no idea what the customer actually bought. The transaction appears on the bank statement as “PayPal” only. This gives PayPal complete control when it comes to data mining.
- PayPal is fast.
- PayPal refuses to partner directly with banks – it partners directly with merchants instead.
In a short time, PayPal has managed to establish itself as a completely new payment method on the Internet (and even offline) – offering a reliable alternative. Let’s take a look at why PayPal has had one of the best business strategies ever.
What can we learn from PayPal?
The story of PayPal’s success is based on two huge pillars. The first is simple – by sheer luck, they accidentally became the preferred payment provider for eBay transactions. This was followed a few years later by their $ 1.5 billion acquisition by eBay. eBay was smart enough to leave them alone, and thanks to their courage, they were able to conclude a series of deals with other online merchants to try to replicate their success with eBay.
Here comes the second pillar of their success. Partnerships. Banks have always been concerned about forming direct partnerships with small retailers – instead, they have relied on their corporate partners (Visa / MasterCard) to do this job. They did not want to worry about managing many different contracts and were extremely confident that credit and debit cards would always be at the heart of the payment system. But the problem was that MasterCard itself was already working on a partnership with PayPal. Leaving the benches on the outside.
Today, PayPal has a staggering 54% share of the payment processing market. Almost all of this growth came from their direct relationships with large and small traders.
Modesty can be the best business strategy
In 1973, the so-called “Big Three” automakers in the United States (General Motors, Fiat Chrysler, Ford Motor Company) had more than 82% of the domestic market share. Today they have less than 50%. The main reason is the aggressive (and unexpected) entry of Toyota-led Japanese carmakers into the U.S. market. That was in the 1970s.
Cars are big, heavy and expensive to transport. This is one of the reasons why the American market was so surprised when Toyota started selling cars made in Japan in the USA market, at prices too low to compete. The auto industry had made a huge contribution to the US economy, so one of the first reactions from the government was to introduce protectionist taxes on all car imports – making Japanese cars as expensive as locally made cars. But the tactic failed.
In a few years, Toyota (and others, by now) has been able to set up production plants in the United States, eliminating the constraint to pay import taxes. At first, American carmakers were not very worried. Certainly, with production moving to the United States, production costs for Japanese automakers should have increased to about the same level as those of local automakers. But this did not happen. Toyota continued to produce cars (now made in the United States) for much cheaper than American companies.
Toyota’s fine-tuned production processes were so efficient that they managed to beat US carmakers to their own game. You’ve probably heard of the notion of “continuous improvement.” In the world of production, Toyota is the exact grandfather of this.
What can we learn from Toyota?
Most of the business success stories you’ve read – especially in the Western world – involve bold moves and stories of competing against all odds. What makes this special story so unique.
The fact is Toyota spent years studying the production lines of American automakers, such as Ford, because they knew that the American automobile industry was more advanced and efficient than the Japanese. So they took their time and used it. They studied their competitors and tried to copy what the Americans did so well. They mixed those processes with their strengths and came up with something even better.
Toyota showed that knowing your own weaknesses can be the key to success – becoming one of the best business strategies you can ever implement.
And there was something else. Could you name just one famous Toyota executive? No. And one of the reasons is that Toyota’s number one value is modesty. This value that helped them dominate the US market is deeply rooted in the organization, top-down, from executives to simple workers.