“What is business strategy?” is the question that popped up this morning in my daily conversation with Frank Gong. Lacking a sufficiently succinct definition proposed by either Google or Baidu, we set out to dissect the term.
Business is the exchange of the tangible or intangible for a kind of payment. More specifically, it is the selling of a product or a service to a customer. When the demand for a product or service is larger than the supply, it is sufficient to simply have ‘business’. Make the product or perform the service and you will make money. In this case there’s no need for a strategy, let alone putting effort into finding a good strategy.
Example: a friend decided to start his own company to make electronic components with relatively low complexity. He previously made products as a hobbyist and was able to sell them to customers directly as well as a larger distributor. The distributor agreed to sell the products he is working on in his first year of business.
In this example, because the demand is already there it is sufficient to simply have business. Do it, and you make money.
Sadly, in most markets and industries supply far outweighs demand. In this case, simply making the product or doing the service will not be enough to be successful. You will need a strategy to make it work.
A strategy is a specific plan designed to achieve certain goals. When forming a strategy, the firm must consider three things:
- What are the existing and potential attributes of my product or service?
- What are customers willing to pay some money for?
- Which attributes do we focus on such that we are unique in the market?
Attributes can take many forms, both tangible or intangible. For example, a smartphone has tangible attributes such as screen size, camera quality, battery lifespan, operating system, storage size; and intangible attributes such as privacy, design style, after-sales customer care.
As part of the strategy, a firm must choose which of those attributes to focus on. Focus implies that the firm aims to achieve excellence for that particular attribute. It is in a sense the true north of the firm in this business.
In most cases, it is not sufficient to choose only one attribute. Focusing on only one attribute makes it easy for your competition to copy your focus and you’ll be in trouble. A firm’s unique value proposition is the unique collection of attributes that the firm decides to focus (and not focus) on.
Thus we can propose the following definition: a business strategy defines the unique set of specific attributes the firm chooses to focus on aiming to achieve superior long-term return on invested capital.
Good Business Strategy
In the previous section we talked about business strategy in general. But what sets apart business strategies? Which strategies are bad, good, great, or even fantastic?
This depends on the market.A firm’s goal is to achieve short-term revenue growth and superior long-term sustained return on invested capital. If you achieve the goals, then it means you chose a good business strategy. If you don’t achieve the goals, then it’s a bad business strategy.
Returning to the attributes, we said it’s not sufficient to simply identify those you want to focus on. It’s also important to identify those attributes the market is willing to pay some money for. Achieving excellence in an attribute no one is willing to pay for is a wasted effort and will reflect in poor long-term return on invested capital.
Of course there’s more that goes into achieving success than just having a business strategy with good potential. The business strategy success relies on the execution. A fantastic business strategy with poor execution will fail, but a good business strategy with good execution will bring some success
What’s Not Business Strategy
In the real world often people confuse business strategy with the actions, aspirations or visions of a firm. While these are not part of the strategy, they often support the formulation or execution of the strategy. A couple of examples:
“Our strategy is to expand globally” is not a business strategy, but rather a business tactic in support of the business strategy. Expanding globally only makes sense in the context of making a specific business strategy succeed.
“Our strategy is to be market leader” is not a business strategy, but rather a goal you set as an indication of business strategy success. To be market leader can be the result of a successful business strategy.
“Our strategy is to best understand our customer needs” is not a business strategy, but rather an activity that helps you better understand which specific attributes your firm should focus on. Better understanding of the customer needs will help you choose those attributes customers are willing to pay money for.