As James Brian Quinn indicated in The Strategy Process: Concepts and Contexts, "a strategy is the pattern or plan that integrates an organization's major goals, policies, and action sequences into a cohesive whole. A well-formulated strategy helps to marshal and allocate an organization's resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents." All types of businesses require some sort of strategy in order to be successful; otherwise their efforts and resources will be spent haphazardly and likely wasted. Although strategy formulation tends to be handled more formally in large organizations, small businesses too need to develop strategies in order to use their limited resources to compete effectively against larger firms.
Formulation of an effective business strategy requires managers to consider three main players—the company, its customers, and the competition—according to Kenichi Ohmae in his book The Mind of the Strategist. These three players are collectively referred to as the strategic triangle. "In terms of these three key players, strategy is defined as the way in which a corporation endeavors to differentiate itself positively from its competitors, using its relative corporate strengths and weaknesses to better satisfy customer needs," Ohmae explained.
Quinn noted that an effective business strategy should include three elements: 1) a clear and decisive statement of the primary goals or objectives to be achieved; 2) an analysis of the main policies guiding or limiting the company's actions; and 3) a description of the major programs that will be used to accomplish the goals within the limits. In addition, it is important that strategies include only a few main concepts or thrusts in order to maintain their focus. They should also be related to other strategies in a hierarchical fashion, with each level supporting those above and below. Finally, strategies should attempt to build a strong yet flexible position for the company so that it may achieve its goals whatever the reaction of external forces. "Strategic decisions are those that determine the overall direction of an enterprise and its ultimate viability in light of the predictable, the unpredictable, and the unknowable changes that may occur in its most important surrounding environments," Quinn stated.
The strategic choices available to a company are not unlimited; rather, they depend upon the company's capabilities and its position in the marketplace. "At the broadest level formulating competitive strategy involves the consideration of four key factors that determine the limits of what a company can successfully accomplish," Michael E. Porter wrote in his classic book Competitive Strategy. Two of these limiting factors are internal, and the other two are external. The internal limits are the company's overall strengths and weaknesses and the personal values of its leaders. "The company's strengths and weaknesses are its profile of assets and skills relative to competitors, including financial resources, technological posture, brand identification, and so on," Porter stated. "The personal values of an organization are the motivations and needs of the key executives and other personnel who must implement the chosen strategy."
The external factors limiting the range of a company's strategic decisions are the competitive environment and societal expectations under which it operates. "Industry opportunities and threats define the competitive environment, with its attendant risks and potential rewards," Porter noted. "Societal expectations reflect the impact on the company of such things as government policy, social concerns, evolving mores, and many others. These four factors must be considered before a business can develop a realistic and implementable set of goals and policies."
Once a company has analyzed the four factors, it may then begin developing a strategy to compete under or attempt to change the situation it faces. The approach to strategy development recommended by Porter involves identifying the company's current strategy; revealing underlying assumptions about the company's position, its competitors, or industry trends affecting it; analyzing the threats and opportunities present in the external environment; determining the company's own strengths and weaknesses given the realities of its environment; proposing feasible alternatives; and choosing the one that best relates the company's situation to its environment.
The number of potential business strategies are probably as great as the number of different businesses. Each distinct organization must develop a strategy that best matches its internal capabilities and its situation with regard to the external environment. Still, many of the numerous strategies pursued by businesses can be loosely grouped under three main categories—cost leadership, differentiation, and focus. Porter termed these categories "generic strategies," and claimed that most companies use variations of them, either singly or in combination, to create a defensible position in their industry. On the other hand, companies that fail to target their efforts toward any of the generic strategies risk becoming "stuck in the middle," which leads to low profitability and a lack of competitiveness.
COST LEADERSHIP The first generic strategy, overall cost leadership, can enable a company to earn above average profits despite the presence of strong competitive pressures. But it can also be difficult to implement. In a company pursuing a low-cost strategy, every activity of the organization must be examined with respect to cost. For example, favorable access to raw materials must be arranged, products must be designed for ease of manufacturing, manufacturing facilities and equipment must continually be upgraded, and production must take advantage of economies of scale. In addition, a low-cost strategy requires a company to implement tight controls across its operations, avoid marginal customer accounts, and minimize spending on advertising and customer service. Implemented successfully in a price-sensitive market, however, a low-cost strategy can lead to strong market share and profit margins.
Of course, a low-cost strategy—like any other strategy—also involves risks. For example, technological changes may make the company's investments in facilities and equipment obsolete. There is also the possibility that other competitors will learn to match the cost advantages offered by the company, particularly if inflation helps narrow the gap. Finally, low-cost producers risk focusing on cost to such an extent that they are unable to anticipate necessary product or marketing changes.
DIFFERENTIATION Companies that pursue a strategy of differentiation try to create a product or service that is considered unique within their industry. They may attempt to differentiate themselves on the basis of product design or features, brand image, technology, customer service, distribution, or several of these elements. The idea behind a differentiation strategy is to attract customers with a unique offering that meets their needs better than the competition, and for which they will be willing to pay a premium price. This strategy is intended to create brand loyalty among customers and thus provide solid profit margins for the company. Although the company may not be able to achieve a high market share using a differentiation strategy—because successful differentiation requires a perception of exclusivity, and because not all customers will be willing or able to pay the higher prices—the increased profit margins should compensate. Naturally, there are risks associated with committing to a differentiation strategy. For example, competitors may be able to imitate the unique features, customers may lose interest in the unique features, or low-cost competitors may be able to undercut prices in a way that erodes brand loyalty.
FOCUS Companies undertaking a focus strategy direct their full attention toward serving a particular market, whether it is a specific customer group, product segment, or geographic region. The idea behind the focus strategy is to serve that particular market more effectively than competitors on the basis of product differentiation, low cost, or both. Since focusing on a small segment of the overall market limits the market share a company can command, it must be able to make up for the lost sales volume with increased profitability. The focus strategy, too, entails risks. For example, there is always a possibility that competitors will be able to exploit submarkets within the strategic target market, that the differences between the target market and the overall market will narrow, or that the high costs associated with serving the target market will eliminate any advantage gained through differentiation.
Each of the three generic strategies identified by Porter requires a company to accumulate a different set of skills and resources. For example, a company pursuing a low-cost strategy would likely have a much different organizational structure, incentive system, and corporate culture than one pursuing a differentiation strategy. The key to successful implementation of one of the three generic strategies is to commit to it fully, rather than take half-measures that do not distinguish the company in any way.
In the past, the formulation of strategy—at least in large corporations—was the domain of upper-level management. The traditional approach involved top managers coming up with a strategic direction for the company, setting it forth in an annual written strategic plan, and then disseminating the plan to various departments and employees, who were expected to contribute only within their own spheres of influence. This approach seemed to work fairly well for slow-moving companies in a stable external environment. In recent years, however, the process of developing strategy has changed dramatically in response to changes in the overall business world. "There is little question that the traditional approach to strategic planning, formulated in a different era, is often inadequate to deal with the rapid and continuous changes taking place in today's marketplace; it also fails to take into account the increased demand for autonomy in today's work force," Stephen J. Wall and Shannon Rye Wall wrote in Organizational Dynamics.
Traditional approaches to strategy development have been criticized for being too rigid, inflexible, and authoritative. Experts claim that these approaches were too concerned with analysis and quantification to be able to predict and adapt quickly to market changes. As a result, new approaches have emerged that no longer relegate strategy to top management; instead, the strategy formulation process involves all individuals in an organization, particularly those who are in direct contact with customers. "A new approach to the strategic planning process, one that involves managers at all levels, can result in a dynamic process that increases competitive advantage," Wall and Wall wrote. "Strategic planning is evolving due to the increasingly urgent need for responsiveness to market changes."
In large measure, the changes that have taken place in business strategy have come as a result of changes in the environment. As the global marketplace has become increasingly volatile and competitive, companies have had to adjust by reducing their time frames for responding to changing customer needs. In addition, the changes in business strategy have come in part because today's workers tend to want and even demand more control over their work lives. The combination of these two factors has resulted in a new value being placed on employee participation in the strategy process. "In an environment in which change is the norm, the insights of those on the front lines take on a new importance, since those close to the action—salespeople and others who deal directly with outside clients—are first to get wind of changes in customer needs," according to Wall and Wall. With this in mind, many companies are now choosing to develop strategy through the creation of multifunctional teams. Combining employees from various functional areas in this way tends to promote strategic thinking, because the groups are able to focus on broad company goals rather than on more limited functional, department, or individual goals. In addition to establishing cross-functional teams within the organization, some companies are beginning to solicit strategic input from their external customers and suppliers as well.
Employee participation in the strategy process not only helps the company to develop a more responsive strategy, but also improves employee morale and commitment to the organization. Companies that encourage such participation are creating a more knowledgeable workforce, which is particularly important for small businesses since intellectual capital is often one of their most valuable assets.
The new, participative approaches to strategy formulation can also enable companies to improve their focus on customer needs by increasing the access of line employees to top management. In fact, hierarchies are designed to filter the information that goes to upper-level managers. But this lack of information can lead to overconfidence and myopic decision making. Similarly, the new approaches can also help companies to remain flexible and responsive to market changes. The greater amount of information that managers receive about the market enables them to adapt the company's strategic direction to take advantage of new circumstances.
Participative strategic development also may help companies to retain key employees, because employees gain satisfaction by being able to direct and see the results of their efforts. "Retaining these highly skilled and trained professionals will become increasingly important as knowledge has more and more to do with the company's ability to build and maintain a competitive advantage," Wall and Wall noted. Finally, participating in strategy formulation may enable managers to make better use of their time. This benefit is particularly helpful because time is always limited as companies try to do more with less people.
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SEE ALSO: Business Planning