Business strategyis sometimes defined only as a firm's high-level plan for reaching specific business objectives. Strategic plans succeed when they lead to business growth, a strong competitive position, and strong financial performance. When the high-level strategy fails, however, the firm must either change its approach or prepare to go out of business.
The brief definition above is accurate but, for practical help, many businesspeople prefer instead a slightly longer explanation:
Business strategy is the firm's working plan for achieving its vision, prioritizing objectives, competing successfully, and optimizing financial performance with its business model.
The choice of objectives is the heart of the strategy, but a complete approach also describes precisely how the firm plans to meet these objectives.As a result, the strategy explains in practical terms how the firm differentiates itself from competitors, how it earns revenues, and where it earns margins.
Strategies Reflect the Firm's Strengths, Vulnerabilities, Resources, and Opportunities. And, They also Reflect the Firm's Competitors and Its Market.
Many different strategies and business models are possible, even for companies in the same industry selling similar products or services. Southwest Airlines (in the US) and Ryan Air (in Europe), for instance, have strategies based on providing low-cost transportation. The approach for Singapore Airlines focuses instead on brand image for luxury and quality service. In competitive industries, each firm formulates a strategy it believes it can exploit.
Formulating Strategy Is All About Meeting Objectives (Goals)
In business, the strategy begins with a focus on the highest level objective in private industry: Increasing owner value. For most companies, in fact, that is the firm's reason for being. In practical terms, however, firms achieve this objective only by earning profits. For most firms, therefore, the highest goal can be stated by referring to "profits." The generic business strategy, therefore, aims first to earn, sustain, and grow profits.
An Abundance of Strategies
Strategy discussions are sometimes confusing because most firms, in fact, have many strategies, not just a single "business strategy." Analysts sometimes say marketing strategy when they, in fact, mean the firm's competitive strategy. And, a firm's financial strategy is something different from its pricing strategy, or operational strategy. The firm's many strategic plans interact, but they have different objectives and different action plans.
The Strategic Framework
The subject business strategy is easier to understand—to make coherent—by viewing each one as part of a strategic framework.
The strategic framework is a hierarchy. At the top sits the firm's overall (or generic) business strategy. Here, the aim is the highest-level business objective: earn, sustain, and grow profits. Some may immediately ask: Exactly howdoes the firm achieve it's profit objectives?
Firms in competitive industries answer the "how" question by explaining how the firm competes. For these firms, therefore, the overall business strategy is rightly called competitive strategy. A "competitive strategy" explains in general terms how the firm differentiates itself from the competition, defines its market, and creates customer demand.
However, detailed and concrete answers to the "how" question lie in lower level strategies, such as the marketing strategy, operational strategy, or financial strategy, The marketing strategy, for instance, might aim to "Achieve leading market share." Or, "Establish leading brand awareness." Financial strategy objectives might include: "Maintain sufficient working capital" or "Create a high-leverage capital structure."
Understanding the Strategic Framework
Indeed, most firms develop and use a rich and complex strategic framework. As a result, business strategy formulations are more explicit when they focus on these points:
- Specific business objectives for each strategy. Identifying which goals in the framework have priority over others.
- Mapping relationships between the various strategies. Showing, for example, which of them support others.
This article, therefore, presents business strategies as components of a strategic framework.
Explaining Business Strategy in Context
This article further explains and illustrates business strategy in the context of related terms such as the following:
- What is a business strategy?
- Purpose of the Strategy: How do you know the strategy serves its purpose
- How do you formulate a business strategy? Formulating a general business strategy in five steps.
- Brand, the branding process, and branding strategies: See Branding.
- Pricing, pricing objectives, and pricing strategies: See Pricing.
- Company profitability metrics. See Profitability.
- Capital and financial structures. See Capital Structure, Financial Structure, and Leverage.
Strategies and the Meaning of Success
Business strategies succeed when they lead to business growth, strong competitive position, and strong financial performance. Many different approaches are possible, but all are meant to bring improvements in these areas.
In highly competitive industries, the firm's officers and other senior managers take a keen interest in knowing precisely how well their strategies succeed in serving this purpose. Interest is especially keen immediately after the company changes or adjusts plans.
Dominos Pizza Changes Strategies. Was the New Strategy Successful?
In 2009, for instance, managers and owners of Domino's Pizza, Inc. were distressed because the firm had just had three years of negative sales growth and shrinking market share. The firm was, in particular, losing market share to two significant competitors, Papa John's and Pizza Hut.
Domino's operates in the "Quick Service Restaurant" (QSR) industry. Many people call this industry, unkindly, the "Fast Food" business. The firm competes not only with other Pizza restaurants, but also with restaurants with different menus such as Subway, McDonald's, and Chick-Fil-A. This segment of the Restaurant industry defines itself not by menus, but instead by the words "Fast" and "Quick." Understandably, therefore, Domino's started with a strategy based on "Quick Service Delivery." The firm excels in fast delivery, a point that separates Domino's from its competitors. Nevertheless, in 2009, the strategy seemed to be failing.
In late 2009, therefore, the firm's new CEO chose to "re-center" strategy on pizza quality. Market research showed that customers rated Domino's pizza taste as very poor ("like cardboard"). As a result, by the end of 2009, the firm had substantially improved the pizza recipe and launched a marketing program to bring this news to the market. The question on January 1, 2010, was: Will the new strategy work?
The Results Are "In." Strategy Change Succedes.
Anxious for an answer, the firm began in Q4 2009 detailed tracking of the growth, competitive, and financial metrics that appear in the next section. By the end of Q1 2010, the first results were "in." The measures in all three categories showed remarkable improvement. Domino's took this as confirmation the new strategy was succeeding.
Now in 2018, the firm continues to research and improve the pizza recipe, while adjusting its marketing strategy at the same time. For this, the firm relies on its 8-year tracking history with these metrics.
Measuring Success With Strategies
A new strategy or a strategic change is successful when the strategic plan itself is undoubtedly responsible for one or more of the following measurable, tangible results:
Firstly, Business Growth. Growth Means Increasing:
Secondly, Strong Competitive Position, Which Means Increasing:
Thirdly, Strong Financial Performance, Which Means Increasing:
Measure Strategic Impact Precisely
Notice that analysts measure the impact on financial performance with metrics that focus on the firm's core line of business.
Domino's, for instance, prefers to measure strategic impact with EBITDA—Earnings before interest, taxes, depreciation, and amortization. Domino's tracks EBITDA because EBITDA and other selective income metrics measure strategic effects more precisely than overall Net Income After Taxes.
The firm's strategy drives performance in the core line of business, after all, and that is what strategic planners need to measure. "Bottom line" Net income, however, also reflects factors other than core strategy: (1) revenues and expenses from outside the core business, (2) accounting conventions such as depreciation, and (3) taxes. These factors tend to "muddy the waters" when the analyst tries to use Net Income to measure the impact of strategy changes.