4 Questions That Underpin Strategy Development
Written by Dave Bailey
If you ask CEOs about their business strategy, you might hear statements such as:
- ‘Our strategy is to help our customers do X.’
- ‘Our strategy is to grow 100% this year.’
- ‘Our strategy is to internationalise.’
- ‘Our strategy is to build the best product.’
There’s just one problem: none of these statements is actually a business strategy. They are missions, goals, tactics, and descriptive statements.
What exactly is a business strategy? What are the advantages of having one? And what does strategic thinking really mean?
May the Best Man . . . Lose?
It sounds plausible: if you want to win, you have to be the best.
Which team wins the championship? The best team, obviously. Which army wins the battle? The best army, of course.
But what exactly does ‘best’ mean? Is Ferrari, for example, the best car?
Well, maybe . . . for some customers. Those in particular geographies, with a particular set of emotional needs, and a lot of money to spend may find Ferrari their best choice.
But other customers with different needs might conclude that Toyota is the best option — after all, it’s got great gas mileage.
There’s no such thing as an objective ‘best’ and there are many ways to compete well. Both Ferrari and Toyota achieve better economic performance than their competitors, albeit via different strategies.
Strategy is not about how to be the best. At its core, it’s a set of long-term choices that differentiate you from your competitors. It’s about the position, not the plan.
Four Questions to Clarify Your Strategy
The success of a business strategy is measured in a company’s ability to generate long-term profits. In most companies, the responsibility for setting and communicating the business strategy falls on the CEO.
A robust strategy provides insightful answers to four tightly-coupled questions:
- Where are we competing?
- What unique value are we bringing?
- What resources and capabilities do we need?
- How will we sustain our advantage?
Let’s look at each question in turn and discuss some of the most common pitfalls for startups (and big companies). We’ll then see how you can apply strategic thinking to other areas of your business.
1) Where are we competing?
‘Everyone’ is not a strategy.
The sad truth is that you can’t please everyone. A good strategy is explicit about the customers and needs you won’t serve. In other words, you have to choose which customers you’ll make unhappy so that other customers will love you.
There are three sub-questions to answer here:
- Which customers?
- Which needs?
- Which price point?
The way you define your audience and their needs may differ from how your competitors define them. Indeed, if your target audience is based on an insight your competitors don’t have, it may give you an advantage.
For example, Ikea decided to compete globally, targeting design-conscious consumers with limited space and limited budget. In doing so, they framed a large market that was underserved.
However, choosing which customers to serve is only half the story. Every company has competitors and substitutes — even if the substitute is simply choosing not to use any product. The particular dynamics of this competitive environment (described by Porter’s 5 Forces) can have a huge impact on overall performance.
Let’s take Uber, for example. Neither drivers nor riders have much power to negotiate on prices, and the financial barriers to entry for new competitors are very high. However, competitive rivalry with Lyft, Ola, and Bolt have severely limited Uber’s ability to make a profit.
2) What unique value are we bringing?
‘Better’ is not a strategy.
As we’ve seen, in strategy as in life, there is no ‘best’. Instead, the goal is to deliver something unique that gives you an advantage over competitors.
There are two ways to create an advantage:
- Offer something differentiated that customers are willing to pay more for.
- Have a lower cost-structure than your competitors.
If you can’t differentiate from your competitors and your costs are about the same, it’s unlikely you’ll generate economic returns.
Some companies differentiate by improving underlying product capabilities. But an equally powerful way of differentiating your product is to improve customer perception of it. In business strategy, marketing is just as important as innovation.
Differentiation means trade-offs.
You have to decide which benefits you’re willing to give up, so you can deliver something your competitors can’t.
This can feel uncomfortable, especially if you worry about making the wrong choice. The good news is that the opposite of a good strategy might well be . . . another good strategy. To return to our car analogy for a moment, a Ferrari guzzles gasoline while a Toyota is focused on fuel-efficiency. There are many ways to be unique.
3) What resources and capabilities do we need?
‘Best practice’ is not a strategy.
If you’re a startup, you want to hire outstanding engineers, implement Agile product development, and use OKRs (objectives and key results). However, best practice alone isn’t enough to generate a sustained advantage, since your competitors will eventually adopt them too. They are table-stakes.
Best practices are what you should do the same as your competitors. Strategy is about choosing what you’ll do differently.
Resources can be tangible — cash, equipment, existing customers — or intangible — brand, IP, knowledge. Capabilities are what you can do with your resources. For example, Apple knows how to leverage its brand to sell products.
A strategy should clarify which resources and capabilities can help deliver your unique value proposition. In 1997, Steve Jobs decided to cut most of Apple’s product lines to focus on a small number that made sense to customers.
‘The essence of strategy is choosing what not to do’ — Michael Porter
But it may be worth bearing in mind that if no-one in your organisation is upset with your strategy, you may be avoiding a hard choice.
4) How will we sustain our advantage?
‘Denial’ is not a strategy.
If you crack the code and turn a significant profit, you’ll attract competition. If you can defend yourself, you’ll remain profitable, like Apple. If you can’t defend yourself, your profits will be competed away, like in the airline industry.
In 7 Powers: The Foundations of Business Strategy, Hamilton W. Helmer explains that an invention may create economic value, but without a defensive ‘moat’ a company can’t capture that value. According to Helmer, there are only seven types of moat:
- Scale Economies, where unit costs decline as volume increases
- Network Economies, where the value of a service increases as new users join
- Switching Costs, where the time, effort, and money required to change suppliers preserves the status quo
- Branding, where an otherwise identical product generates more value by eliciting good feelings, or giving ‘peace of mind’
- Counter Positioning, where incumbents won’t copy a business model due to anticipated damage to their existing business.
- Cornered Resource, where a company has unique access to a coveted asset, such as IP, talent, or relationships
- Process Power, where company organisation enables lower costs/superior product
Identifying these moats early on will help you sustain your profits over the long-term.
Don’t Be Predictable
Strategy is one area where logical decisions might get you into trouble — if you follow the same widely-accepted principles as everyone else, you’ll end up in the most competitive part of the market, where it’s a bloodbath.
‘Strategy is the science of knowing what conventional logic is wrong about’ — Rory Sutherland
A good strategist looks for unconventional rationales. Analogies, inferences, and contrarian viewpoints often generate interesting positions that other approaches miss.
The Strategy Synopsis
The following exercise outlines the basic elements of a business strategy. It forces you to articulate clearly where you compete, your unique value, your strategic resources and capabilities, and how you’ll defend against competitors.
Our competitors today are ___[competitors and substitutes]. The environment has been characterised by ___[summary of Porter’s 5 Forces].
We realised that ___[unique insight]. That’s why we’re focused on ___[underserved niche of the market] that cares deeply about ___[specific needs] at ___[price point].
To that end, we decided not to offer ___[benefits competitors offer], but instead, we’re the only company that offers ___[unique value proposition].
We can do this because we’re building ___[strategic resources] and we’re developing ___[strategic capabilities].
Even if ___[biggest competitor] tried to compete with us, we have ___[one or more strategic moats]. We’ve already ___[proactive steps taken to build a moat].
Applying Strategic Thinking
These strategic concepts apply to business functions as well. Let’s take marketing as an example.
While the measurement of business is a superior return on shareholder equity, marketing is about getting a superior return on investment. Therefore, a marketing strategy is a set of choices that differentiate a company’s marketing efforts from its competitors’.
Many startups claim their marketing strategy is: ‘Facebook and Google ads, regular posts on social media channels, and creating search-engine optimised content.’ However, since every startup is doing this, you’re not describing a strategy but a set of best practices . . . unless you have some competitive advantage that others don’t have.
A marketing strategy requires you to figure out how to gain a sustainable advantage over other companies either in terms of lower costs or higher conversion rates. You’ll have to understand the marketing environment and identify a unique marketing proposition that can’t be easily mimicked.
Strategy vs. Planning
Planning involves taking a set of choices and mapping them into action. On the whole, planning tends to reduce anxiety. That’s why writing out a to-do list helps when you’re anxious.
Strategy, on the other hand, may increase your anxiety. It’s about making hard choices. It requires you to be different, to clarify what you won’t do, and to make some potential customers hate you. It’s long-term, risky, and uncertain.
Strategy is hard work . . . but if you don’t have a strategy, how do you expect to win?
About Dave Bailey
Hi, I’m Dave Bailey and I coach tech CEOs from Series A to pre-IPO. Join 20,000 entrepreneurs who receive my new essay every week.
I will never sell your information, for any reason.