Business strategy and strategic management are cool words. People like to use them. It leaves a good impression with your audience when you talk about ‘strategy‘.
But business strategy is probably the most misused word in strategic management. And I have the impression that the more people talk about business strategies in a conversation, the less they know about the subject 😉
Most people who use it don’t really know what strategy is all about or don’t understand the important underlying business strategy principles.
This mini guide about business strategy and strategic management wants to change that.
Here’s a list a 7 things I believe every leader should know about business strategy, strategic management and it’s core principles.
Know these inside out and you will do better than 80 percent of the managers that you will come across
You can check out the ‘what is business strategy’ video or go directly to the 7 business strategy principles:
Business Strategy – Ultimate Guide
Here’s a short video I recorded for the Institute for Strategy Execution to explain strategy and the core business strategy principles.
1. Business Strategy = compete to be unique, not to be the best
Strategy is not about being the best, but about being unique. Competing to be the best in business is one of the major misconceptions about strategy.
And if you only remember one tip from this list, it should be this one. Many leaders compare competition in business with the world of sports. There can only be one winner. But competing in business is more complex. There can be several winners. It does not have to be a zero sum game – you win, I lose or vice versa.
Within a single industry, you can have several companies beating the industry average, each with a distinctive, different strategy. They are no direct threat to each other. There can be several winners. So the worst possible approach to strategy is to seek out the biggest player in the industry and try to copy everything they do.
2. Business Strategy = compete for profit
Business is not about having the largest market share or about growing fast. It’s about making money.
‘I want to grow my business’ is not a business strategy. ‘I want to grow my business’ is the same as saying, ‘I want to be rich’.
Those things (unfortunately) don’t happen by themselves. Growing is not a strategy, it’s a consequence. When someone includes growth in their strategy, there should be an orange light starting to blink.
That does not mean that you cannot use the word ‘growth’. I use it a lot in the analysis phase – for example, when you talk about growth areas of the business or when you look for growth platforms – areas where you can reach potential that will give you additional profit.
3. Know your industry before you develop your business strategy
A company is not an island – it’s part of a larger ecosystem, an industry. Each industry has its own characteristics, its own structure. This structure and the relative position your company has within the industry determines profitability. Certain industries have a higher return than others.
Your thinking about the industry and industry competition will determine your thinking about your strategy – how you are going to compete within the industry.
The better you know and understand the industry, the better you will be able to determine elements that will make you stand out, be unique and reap a higher average return than the industry average.
4. Business Strategy = Choice
In my eyes, this is the most simple strategy definition. You need a clear choice of WHO you are going to serve and a clear choice of HOW you are going to serve those clients.
It’s about connecting the outside world – the demand side – with your company – the supply side. Or in fancy terms: you need a value proposition for a specific customer segment and to develop unique activities in the value chain to serve them.
The key word is ‘choice’.
You cannot be everything to everybody. You want to target a limited segment of potential buyers with the same needs. Next, you are going to tailor your activities in such a way that they meet these needs.
Or in fancy terms: you want to tailor your value chain – your company’s activities – to your value proposition. Strategic innovation is the process to make those choices – defining a new who and how for the organization.
5. A good business strategy requires you to say NO often
If you have clearly defined what you go for – a clear value proposition for a specific client segment (who) and a set of distinct, unique activities in your value chain to offer the needs of this client group (what), you will find out that there are lots of things that you are not going to do.
There will be customers that you are not going to serve, activities that you are not going to perform and services/products that you will not be offering.
In business strategy, choosing what not to do is equally important.
Using the words of the founding father of modern strategy thinking, Michael Porter: “The essence of strategy is choosing what not to do”.
Each business strategy should also have a section where it clearly states the noes.
6. Business strategies requires you to keep moving
Having a good business strategy means that you have arrived. Competitors move, customers’ needs and behaviors change, technology evolves. One crucial element to determine a future path for your company is to predict these evolutions and trends and incorporate this thinking into the business strategy-building process.
If you don’t, you can miss out on new value that is created in the industry or even left behind and get into trouble.
Think about the smart phone and Nokia and you’ll understand.
7. Scenario thinking is an important business strategy tool
The last one of the business strategy principles is not the least important. I don’t have to tell you that facts and figures can only go so far. You need to turn data into assumptions that will fuel your reflection process. The standard way to work with assumptions in a structured way is by scenario thinking – fix some parameters and let other vary.
This technique helps your reflection process by offering you possible future routes (read: strategic options) for the company.
I believe that scenario thinking is a crucial skill for anyone who wants to deal with business strategy.
Every leader should at least master the basics so that they don’t need a strategy consultant for every reflection process or at least to help them challenge the scenario models that the strategy consultant presents.
I got a lot of demands asking me for the best business strategy books. I plan to do a longer post in the near future, but as a starting point, here are my four favorite books on business strategy:
First, I recommend “Understanding Michael Porter: The Essential Guide to Competition and Strategy“ by Joan Magretta. It covers all the strategy essentials developed by Michael Porter. And, you have all the great ideas from Porter (types of business strategy, 5 forces, competitive advantage example, ….) in one book that reads easy. (Although some of the strategy content will be challenging if you don’t have a background in business strategy)
Second, I would go for “Good Strategy/Bad Strategy: The difference and why it matters“ by Richard Rumelt. A bit more advanced than the first one but also quite well written. The NASA story is great and I have referenced it in my latest book.
Third, I would suggest the latest book from Chris Zook and James Allen: “The Founder’s Mentality: How to Overcome the Predictable Crises of Growth.” This book is very interesting as it covers a typical strategy challenge – how to keep your business growing. Both authors are partner at Bain & Co, a well known strategy consultancy.
My final reading tip is not so much a book on strategy but a book that gives you a peak inside the world of strategy consulting: “The Lords of Strategy: The Secret Intellectual History of the New Corporate World”
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