Find out how a business strategy works, how you need to implement it and which one is complimentary to your business in this comprehensive resource.
What is your business strategy? The majority of senior executives can confidently answer this question. How has your strategy changed over time? This is usually also answered quickly. But when you ask, how do you make decisions about changing your strategy? It gets more challenging to answer.
The truth is, many senior executives find it challenging to describe how they make strategic decisions. That’s a serious obstacle, as the process of making strategic decisions can shape your actual strategy, according to Harvard Business Review. Creating a strategy without knowing your process is like traveling without a map, you’re setting yourself up for a long, stressful journey filled with dead ends, wrong turns and countless delays.
Use this comprehensive resource to find out everything you need to know about business strategy:
Four approaches to strategic decision making
Harvard Business Review interviewed 92 current CEOs, founders, and senior executives and asked detailed questions about their approaches to strategic decision making. From their responses four distinct approaches to strategic decision making were revealed.
Businesses’ systems differ from each other in two distinct ways. Firstly, whether a company uses a high or low level of process to make strategic decisions, for example, does it have recurring routines for discussing strategy, triggering and reviewing strategic changes?
Related: 8 Free resources for setting up business processes and systems
The second distinction is the amount of input leaders will consider from employees, while making strategic decisions. This step focuses on employee involvement in decision making, not simply attendance at meetings or post-decision communications.
These two factors can exist in any pairing, which gave the Harvard Business Review four distinct models of strategic decision making:
1. Unilateral firms
These businesses tend to be both low process and low input. It’s typically a top-down leader who makes decisions alone. These business leaders often had difficulty explaining their decision-making process and the role of their other employees.
While conducting the interviews, Harvard Business Review found that these types of business leaders tended to have one of two reactions. Namely, half disliked their process and admitted that they should do things differently, while the others seemed confident in how they came to their decisions.
The benefits of this type of strategic decision approach is, that leaders can make decisions, quickly and decisively, without the constraints of debating and having a group come to a consensus. This helps with reaction time and the agility of a business.
However, the disadvantage a unilateral strategic decision approach is that there are few checks and balances. This can put you in hot water, fast. Keep in mind that if you, or your leader, tend to procrastinate on tough decisions it could cause a costly delay, since there is no system in place to force timely action.
2. Ad Hoc firms
An Ad Hoc firm is low process and high input. This type of business doesn’t have a specific, repeatable system that they can follow every time they make strategic changes. When the company needs to change its direction, the leader pulls the team together to decide on an action.
The exact steps the firm follows and the exact people in the team change from one decision to the next.
The advantage of an Ad Hoc system is that the decisions process isn’t restricted by rigid rules. Business leaders can tailor the process to each decision by adjusting certain factors, for example, the length of deliberations and the employees involved.
The main disadvantage is that it leaves businesses open to the risk of not learning how to improve the process of strategic decision making. Additionally, the business leader could use the Ad Hoc process to exclude executives or stakeholders that disagree with their position. This will eliminate the debate stage that fuels this type of strategic decision making and, shift the firm back to unilateral.
Related: How to write a one page business proposal
3. Administrative firms
The administrative firms are high process but low input. This strategy typically follows a rigorous process and well-defined routines to make strategic decisions without actually eliciting debate from other employees.
The main advantage is the detailed data collection and documentation that accompanies this strategic decision-making process. Administrative firms can use this information to improve future changes within the business.
The low level of input can result in poor decisions if leaders are not considering key information or expert opinions. A serious disadvantage is that this process increases the risk of the comprehensive information acting as theatre, masking the lack of broad input from internal and external stakeholders.
4. Collaborative firms
This type of business is both high process and high input. Collaborative firms have the rigorous process of an Administrative firm, but also the engaged employees of an Ad Hoc firm. These leaders showed strong consistency across different types of decisions and could clearly articulate how employees added value during the process, according to Harvard Business Review.
Advantages of this detailed process, ensures that the leaders don’t miss any steps, while the frequent input ensures that they don’t miss any information.
A potential disadvantage could be that the inflexible system can potentially slow down strategic decision making and prevent companies from acting on time-sensitive opportunities. You’ll need to take a hard look at how you’re making strategic decisions.
Ask yourself the following questions:
- Does your approach match where you want to be, given the advantages and disadvantages of each archetype?
- Does the approach fit with the demands of your market and firm?
These questions will reveal whether you need to change, and will help you identify where you need to shit your process.
Related: The different types of business models
Michael Porter’s five competitive profitability forces
If you want to understand how companies achieve and sustain competitive success, Michael Porter’s frameworks are the foundation.
“For instance, that competition is about being unique, not being the best; that it is a contest over profits, not a battle between rivals; that strategy is about choosing to make some customers unhappy, not being all things to all customers,” according to Joan Magretta, Harvard Business Review.
Business leaders think of competition as a tug of war between two rivals, with each striving for more sales or market share. However, competition is more complex than that, according to Harvard Business School Professor Michael Porter.
It’s not about which business is the biggest, it’s about which company is the most profitable, and profitability is defined by five competitive forces:
These are your customers, and they are always happier to pay less and get more. For example, in the airline industry price competition is fierce, because so many travellers just want the cheapest flight.
These businesses give you what you need to run your business. They would ideally like to get paid more, and deliver less. Powerful suppliers will use their clout to raise prices or insist on other favourable terms.
Substitutes are a third source of competition. These are alternative products or services that meet the same criteria as you do. These aren’t always obvious rivals; the toughest competitors may come from different industries.
4. New entrants
New entrants can also create tension in your industry. As an example, South West Airlines challenged the industry by flying just one kind of airplane. This reduced costs and allowed it to offer better ticket deals. This pushed other carriers to spend more to retain their customers.
5. Existing Rivals
You still have to compete with your existing rivals, and intense competition reduces everyone’s profitability. The major airlines have been in this specific condition for a long time. This has forced them to defend increasingly narrow profit margins, with fees for exit row upgrades, checked backs and even snacks.
These five forces define every industry structure and shape your company’s future. Once you understand them you can make better predictions, create competitive strategies and increase your profits.
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Strategy, implementation and execution explained
There is confusion between strategy, implementation, and execution. Is ‘strategy’ deciding the direction of the company, the market it should expand into and how it achieves success? Or is it how to set goals and action and how the company creates and captures economic value over time?
Does it include creating solutions to unexpected challenges and auctioning unexpected opportunities? Is ‘getting this done’ what is meant by implementation or execution? Do you ‘execute’ or ‘implement’ a strategy? Are these different from strategy formation?
There are meaningful distinctions between these three terms that will help you run your business. Ignoring, blurring or getting the terminology wrong creates disordered thinking, deciding, and doing at all levels of your organisation, according to Ken Favaro, lead principal of act2, an independent advisor to executive leaders, teams, and boards.
Strategy consists of two categories: corporate strategy and business unit strategy. To fully understand the terminology it can be broken up further. Corporate strategy consists of CEOs and top executives making three basic choices, says Favaro:
- What should be the capabilities that distinguish the business?
- What should be the company’s comparative advantage in adding value to its individual businesses?
- What markets should the company be in?
These choices are the building blocks of a business strategy and should drive the decisions a business unit’s management team, functions, and staff make every day, including pricing, R&D and where to manufacturer
Implementing a strategy consists of all the decisions and activities required to turn the two sets of strategic choices into reality. If your business has the capabilities, enterprise advantage and preferred business portfolio, your strategy has already been implemented. If the unit has the customers, value proposition, and skills you have chosen to have, its strategy is also fully implemented.
By definition, a strategy can’t be fully implemented because everything that it needs is in constant flux, according to Favaro. CEOs and their executives need to continuously evolve their strategies if they are to remain relevant and competitive. If this is the case, then there will always be a gap between where businesses and what the various strategies call for.
Closing that gap is ‘implementation’. This means that strategy and implementation are continuously running parallel to each other rather than in sequence.
Execution can be defined as the decisions and activities you undertake in order to turn your implement strategy into commercial success, according to Favaro. For your business to achieve execution success is to realise that the best possible results a strategy and its implementation will allow.
Case Study: Netflix
As an example, Netflix has made a corporate strategy choice to enter the content business and to exit the mail order business. Once it is in the content business and out of the mail order business, that ‘strategy’ is implemented. Now, Netflix must set goals and make plans to the content business, stablish the right incentives, create a motivational mission statement for the business leaders to get results from their company.
Those are all the activities needed to produce results within an implementation strategy. This is execution.
Three co-incident determinants of a business result are strategy, implementation, and execution. When you see a company or department achieving poor results over multiple years, no one knows whether it’s due to poor strategy, implementation, or execution. “But in my experience, it’s very difficult to implement a poor strategy well and doubly difficult to produce excellent results with a poor strategy that’s been poorly implemented,” says Favaro.
Having a great business strategy is no guarantee of positive results, you still have to implement and execute it well.
Lim Chow Kiat, group investment officer at Singapore’s GIC, says that for his organisation “nomenclature is destiny… We are meticulous about word choice… The wrong words can corrode, if not corrupt, our business.” You could be doing yourself a great disservice by not being concise and thoughtful about what you mean when speaking about strategy, implementation, and execution.
Related: 10 Elements of a business plan that you can’t afford to leave out
How to find the business strategy for you
As a business leader, you are regularly bombarded with best-selling ideas and best practice for achieving competitive advantage. However, many of these concepts contradict each other. In a business environment that is constantly changing and become uncertain and complex daily, it’s vital to choose the right approach to strategy.
It has also never been more difficult. The number of strategy tools and frameworks that leaders can choose from has grown massively since the birth of business strategy in the early 1960s, according to BCG Henderson Institute. Although the answers as to how these approaches relate to each other or when they should and shouldn’t be deployed is hidden.
The strategy palette
A way to uncover these answers is to implement the strategy palette, a unifying choice framework. This framework was created to match your approach to strategy to the circumstances and execute it effectively. This will help you to combine different approaches to deal with multiple or changing environments.
The strategy palette consists of five archetypal approaches to strategy, which you can apply to different parts of your company: from geography to industry to functions to stages in your business’ life cycle, these will all be tailored to the environment experienced by each part of your firm.
Five strategy environments
Your strategy will depend on your best approach to a specific challenge. Your environment dictates your approach to strategy. You need to assess the environment and then match and apply the appropriate approach, according to BCG Henderson Institute. But, how do your determine the business environment, and how do you choose which approach is best suited?
Business environments vary along three dimensions: Predictability, malleability, and harshness. When combining these into a matrix, five distinct environments are revealed, each of which requires a distinct approach to strategy and execution:
Predictable classical environmentsare best suited for strategies of position. These are based on advantage achieved through scale or differentiation or capabilities. Success is achieved through comprehensive analysis and planning.
Adaptive environmentsneed continuous experimentation from your side, as planning doesn’t work under changing and unpredictable conditions.
In avisionary setting, firms get ahead by being the first to create a new market or to disrupt an existing one.
In ashaping environment, businesses can collaboratively shape an industry to their advantage through the manipulation of other stakeholder’s activities.
Underharsh conditions of a renewal environment, a company needs to first conserve resources to ensure its ongoing viability, only then can it choose one of the other four approaches to rejuvenate growth and ensure long-term prosperity.
Here are the essential factors of each approach at the simplest level:
• Classical: Be big
• Adaptive: Be fast
• Visionary: Be first
• Shaping: Be the orchestrator
• Renewal: Be viable.
Using the right approach can benefit your business. Firms that successfully match their strategy to their environment realise better returns, between 4% - 8% of total shareholder return, over firms that didn’t, according to a study conducted by Harvard Business Review.
There are specific circumstances that work better with one of the five strategies:
This is the approach where leaders believe the world is predictable, competition is stable, and advantage is sustainable. Because the environment cannot be changed firms seek to position themselves optimally in it. Such positioning can be based on superior size, differentiation, or capabilities.
Mars, the global manufacturer of confectionery and pet food, successfully executes a classical approach strategy, because it focuses on categories and brands where it can lead and obtain a scale advantage.
Businesses that employ an adaptive approach are when the business environment is neither predictable nor malleable. The only shield against continuous disruption is a readiness and an ability to repeatedly change oneself.
Tata Consultancy Services, the India-based information technology (IT) services and solutions company, operates in an environment where it can neither predict nor change. It continuously adapts to repeated shifts in technology.
By taking an adaptive approach that focuses on monitoring the environment, strategic experimentation, and organisational flexibility, Tata Consultancy Services has grown from USD155 million in revenue in 1996 to USD1 billion in 2003 and more than USD13 billion in 2013 to become the second-largest pure IT services company in the world, according to BCG Henderson Institute.
Business leaders that take a visionary approach believe that they can reliably create or re-create an environment mostly by themselves. This type of strategy achieves success by being the first to introduce a revolutionary new product or business model. Visionary leaders see a clear opportunity for the creation of a new market segment or the disruption of an existing one, and they act to realise this possibility, according to BCG Henderson Institute.
Quintiles, which pioneered the clinical research organisation (CRO) industry for outsourced pharmaceutical drug development services, employ a visionary approach to strategy. It’s founder and chairman, Dennis Gillings, saw a clear opportunity to improve drug development and created an entirely new business model. Quintiles moved fast and boldly, it maintained its lead and leapt well ahead of potential competition, according to BCG Henderson Institute.
Implement this strategy when your environment is unpredictable by malleable. Your business can lead the shaping and reshaping of a whole industry at an early point in development.
You will need to collaborate with others because you can’t shape the industry alone, by introducing others you also share the risk, contribute complementary capabilities, and build the new market before your competitors.
Novo Nordisk employed a shaping strategy to win in the Chinese diabetes care market since the 1990s. Novo couldn’t predict the exact path of market development, since the diabetes challenge was just beginning to emerge in China, but by collaborating with patients, regulators, and doctors, the company could influence the rules of the game. Now, Novo is the uncontested market leader in China’s diabetes care, with over 60% of the insulin market share.
This strategy aims to restore the vitality and competitiveness of a business when it is operating in a harsh environment. Challenging circumstances can be cause by a mismatch between the company’s approach to strategy and its environment or by an acute external or internal shock.
When the external circumstances are so challenging that your current method is unsustainable, the only course you have is to change course. To restore viability you’ll need to economise by refocusing your business, cutting costs, and preserving capital, while also freeing up resources. This will enable you to fund the next part of your renewable journey.
American Express’s reaction to the financial crisis demonstrates the renewal approach. According to BCG Henderson Institute, as the credit crisis hit in 2008, Amex faced the triple challenge of rising default rates, slipping consumer demand, and decreasing access to capital.
To survive this environment the business reduced 10% of its workforce, shed non-core activities, and cut supplementary investments. A year later it had saved almost USD 2 billion in costs and pivoted towards growth and innovation. In 2014, its stock was up 800%.
Business leaders are at the helm of the company and need to implement a successful business strategy to keep their company going. With majority of executives not understanding the components of a business strategy or how uncomplimentary the strategy they’ve implemented is, how is a business ever supposed to become a success?