How to create effective business strategies

I’ll sound two notes of caution. First, coming up with a business strategy is not hard – it’s done thousands of times a day. The challenge lies in coming up with one that performs; that is not an easy task. Second, formulating business strategy is a complex affair comprised of many moving parts and subtleties. This post can only highlight a few key principles.

What is “business strategy”?

Strategy is a commonly used word that nonetheless can bind people up in knots when they are asked to explain it. By and large, managers correctly have the sense that strategy is committing resources to a long-term course of action in order to achieve a goal better than rivals can. But, asked to drill down to the core of what comprises business strategy, the question leaves most of us resembling deer in the headlights.

Here’s a short definition I’ve presented before.

In combination with a general definition of strategy (the italicized phrase in the paragraph above) it provides the essence of business strategy. The good news: it can all be stated in less than 50 words. The bad news: definitions alone do not make effective strategies.

Four principles of business strategy

However, by combining this definition with four principles, the core requirements for an effective business strategy become clearer.

1. 1. Big goal oriented.Strategy is a high stakes game. The big enchilada: winning wars; getting into medical school; retiring with sufficient assets; winning the league championship; achieving market share; being in business 50 years later.

1. 1. Commit resources long-term. Strategies aren’t fleeting whims. Nor are they little bets. They are Texas Hold’em played for keeps. They take effort and, as Sun CEO Scott McNealy was fond of saying, require “putting all the wood behind one arrow.” Anything less leads to diffusion of effort and risk of failure – if for no other reason than that some competitor is bound to wager all of its chips.

1. 1. Choose a course of action. Strategic “plans” do not achieve goals. Strategies are brought to life by the activities that flow from them. Activities that are thoughtfully and artfully chosen, and uniquelyconfigured and arranged to achieve a goal. Activities that are different from, or performed differently than, those of competitors are the underpinning of competitive advantage.

1. 1. Establish two resulting positions. This is the “special sauce” of business strategies:

1. 1. • Market position. Activities (pricing, offering itself, availability, financing, selling, and hundreds of others) must combine in a way to create perceptible market value, i.e. value in the eyes of buyers. g. If you seek to:
        • Be #1 in your industry, then your market position must attract the largest number of buyers.
        • Dominate a niche, then the activities that combine to create value must be dominant among the buyers in that niche.
        • Command a high profit margin, then your activities must combine to offer the high value to those buyers willing to pay a price premium

1. • Competitive position. The same deliberately chosen activities must separate and distinguish you from your competitors. E.g.
     • Branding activities account for the competitive advantage achieved by Foster Farms chicken, and most top tier personal care products
     • Tom’s of Maine has carved out a niche in personal care products by being distinguished from much larger competitors as “natural”

What makes a strategy effective?

Two fundamental ingredients:

1. Unique activities – different from, or performed differently than, those of competitors
2. Unique market and competitive positions

A strategy founded on the four principles listed above forms the basis of good business strategy.

A strategy based on performing unique activities that combine to achieve unique market value and competitive advantage form the basis of effective business strategy.

Effective strategies force looking outside in

In years working with businesses to formulate, improve or modify strategies, two truisms rise to the surface:

• Strategy usually starts on the inside and proceed outwards
• Effective strategies are those that end up working there way outside in

The failure of most business strategies lies in stopping at the assumptions about the market and competition. Successful strategies I have seen vigorously test those assumptions by playing the role of buyer and competitor. Otherwise intellectually appealing strategies can fall apart when tested from the viewpoint of buyer and competitor.

The reason? There is a natural tendency to view strategy as a battle of two rivals – football, bridge, war – each seeking to “win”. Yet, business is typically a battle of multiple rivals, each of whom has goals that may or may not be similar to your own (see graphic below). Competitors with non-competing goals can often co-exist. It’s only competitors with overlapping goals that compete intensely.

Choosing effective strategies in business is not about win-lose in the bilateral sense. It is about staking out an advantageous market and competitive positions that achieve goals.

The final arbiter of a successful strategy is the customer.

Bottom line

Effective business strategy is based on four principles that culminate in the ability to choose and achieve an advantageous market and competitive position. That can only be done by knowing your market and your competition extremely well.

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Written by Michael

Michael Douglas has held senior positions in sales, marketing and general management since 1980, and spent 20 years at Sun Microsystems, most recently as VP, Global Marketing. His experience includes start-ups, mid-market and enterprises. He's currently VP Enterprise Go-to-Market for NVIDIA.