Introduction to Strategy
Meaning and definition of strategy
Simply put, a strategy, in the business context, is a document that spells out a company’s programmes to achieve success in the marketplace.
A more academic definition would describe strategy as the determination of the long-term goals of a company and the delineation of the courses of action that would help it reach these goals.
A strategy, derived from Strategos, the Greek word for a military general, helps a business meet challenges, expect the unexpected, and achieve its objectives—that is, win its battles in the corporate world.
Management of strategy involves the charting and implementation of the major objectives of a company by the top management on the behalf of the shareholders and other investors.
For doing so, management takes into account the internal conditions within the company (including funds and employee talent available) and the external environment in which it operates (including competitors and government policy for the industry).
Strategy management consists of two processes—formulation and implementation.
Formulation involves a study of the external environment of a company and preparation of a game plan to face its competitors. Several questions about the external and internal environments of the company need to be answered in formulating the strategy. Here are a few of them:
- Who is the target customer?
- Which products should the company produce or not produce?
- How do customers see the company in relation to its competitors?
Strategy implementation, the second process, takes into account how the company will harness its resources to meet objectives.
Meaning and definition of business strategy
A business strategy is a long-term plan that specifies the target of a company and how it will meet these targets.
A business strategy helps a company to decide how best to deploy its resources to meet the expectations of its shareholders and other investors.
Although all companies adopt business strategies, almost all of them focus on just two main objectives:
- Increase the demand for their products
- Reduce the cost of operations
These objectives set down in their business strategies enable companies to record higher profits in the following steps:
- Increased demand for products → Higher sales of products → Higher business volume → Higher profits
- Reduced operational costs → Higher margins → Higher profits
Achieving business strategy objectives
Now, let us discuss a few methods business organisations adopt to achieve their most important strategy objectives—that is, increase the demand for their products and reduce the cost of operations.
Pricing: As part of a business strategy to increase the demand for their products and increase sales, companies may attract customers by offering the lowest prices in the market. For example, a garment manufacturer may offer dresses online at prices lower than all its competitors. To offer low prices, it would have opted for online sales instead of sales through high-rent stores in a central business district.
Branding: Another strategy to increase product demand is to add value to a product so that it is worthy of premium pricing in the eyes of the customers. For example, a washing-machine manufacturer may develop a brand of washing machines with additional features and set the price much above the prices of its competitors’ models.
Infrastructure: As mentioned above, one of the two main strategy objectives is to reduce operational cost. To achieve this objective, a company, for example, may sell its merchandise online, as in the case of a garment seller discussed under “pricing,” above. Or, a book publisher may ask its editors to work from home, for example, instead of at a plush office in the city centre to save on building rentals.
Other goals of strategy
Along with efforts to achieve the all-important business strategy objective of profit, however, companies need to pay attention to the following goals, too:
- how the company will offer the customer a product of value (that is, the value proposition: for example, supply of fresh organic food directly from farms)
- how it will compete with other players in its own industry or sector (by differentiating its product from the products of competitors: for example, premium air travel with luxury services in a market dominated by low-cost operators)
- how it will grow (franchise-supported global expansion, for example), where will the funds come from (investors versus lenders)
As can be seen, an additional benefit of a business strategy is that it helps a company to clarify its priorities to its managers.
A company or a conglomeration of companies may consist of various individual business units and operate in various parts of a country or the world.
Corporate strategy, which is one of the levels of business strategy, dovetails the strategies of these individual units (which form another level of strategy, called business unit strategy) in such a way that the total combined contribution of these units is greater than the sum of their individual contributions.
That is, corporate strategy ensures that the whole is bigger than the sum of the parts.
Concepts of strategy
Strategy as a tool for corporate development has made significant strides in the form of concepts and frameworks evolved since the 1960s. Here are brief introductions to some of these concepts:
The concept of juxtaposing the typical inherent strengths and weaknesses of a company with the opportunities and threats in its environment is known as a SWOT (strengths, weaknesses, opportunities, and threats) analysis.
A SWOT analysis indicates to the decision-makers the chances of a company reaching its goals by overcoming hurdles, and spurs them to improve their strategy management.
Here some further reading on SWOT Analysis.
Another tool of strategy management is the “PEST analysis,” which looks at the environment to find out the political, economic, social, and technological (PEST) factors that may facilitate or disrupt efforts to achieve corporate goal.
Read more about PEST Analysis.
Porter’s Five-Forces Analysis
Porter’s five-forces analysis identifies five forces that shape all segments of industry. The five forces are (1) Competition; (2) Threat of new entrants; (3) Power of suppliers; (4) Power of customers; and (5) Threat of substitute products. The analysis helps managers set their expectations of profitability.
Get a better grasp on the concept here – Porter’s Five-Forces Analysis.
Core competencies are the combination of employee talents and technical capabilities that distinguish a company from its competitors.
Core competencies help an organisation decide where to invest its resources, which markets to enter, and what unique products to offer to its customers, for example.
Read more on Core Competencies.
Horizontal and vertical integration
Horizontal integration is the process by which a business acquires additional infrastructure to augment its production.
For example, a cooking-oil company may acquire additional oil mills to increase its output rather than establish new mills. On the other hand, through vertical integration, a company may start new activities to increase self-dependence.
For example, a courier company may buy its own vehicles rather than continue to depend on transport companies for its operations.
Dig deeper into the topic of vertical and horizontal integration.
The experience curve, an idea developed by the Boston Consulting Group (BCG), is a hypothesis that says that costs decrease by a fixed percentage each time experience is doubled. Simply put, the more experience a company has making a product, the faster and cheaper it will be to produce the product.
The BCG Growth Share Matrix categories the businesses in a corporation’s portfolio into a grid of four cells on the basis of their market share and market growth.
The matrix tags business units as “stars,” “questions marks,” “cash cows,” and “dogs” on the basis of their cash consumption and their share of market growth. It enables corporations to decide which units deserve cash investments and which need disinvestment.
Check out more on the BCG Growth Share Matrix.
The GE McKinsey Matrix also maps business units in a grid, but a grid of nine cells, on the basis of industry attractiveness and the strengths of business units. The matrix plots the relative position of a unit on a template of industry attractiveness.
Learn more about the GE McKinsey Matrix.
MECE Framework (McKinsey)
If are working for McKinsey, or any other elite consulting firm, you’re probably be dealing with tons of data that you organize using the MECE framework. MECE is an acronym for mutually exclusive (ME) and collectively exhaustive (CE).
Learn more about the MECE Framework.
Blue Ocean Strategy
Blue Ocean Strategy is a book written by two professors at INSEAD, an internationally known graduate business school.
Based on strategy initiatives of corporations over 30 years, they came up with the theory that companies can grow by creating new and unexplored markets (blue oceans) rather than by jostling with competitors in already saturated markets (red oceans).
To wind up, strategy management determines the performance of the company in the long run. It is a dynamic function, meaning that it gives scope for periodic evaluation and change.
Whatever the model, strategy management consists of conducting an environmental analysis, setting organisational goals, preparing and implementing strategy, and evaluating and revising strategy.
Major Topics in Business Strategy
— Core Competencies
— SWOT Analysis
— PEST Analysis
— Horizontal and Vertical Integration Strategy
— Porter’s Five Forces Analysis
— GE McKinsey Matrix
— BCG Growth Share Matrix
— Business Strategy Simulation Games
— Management Consulting
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