As the managing partner of the company I work in, it was my task to design a business strategy. Before I started creating it, I too wondered what makes a certain strategy succesful? The answer can be found in scientific research.
There are 9 main factors that determine, if a strategy is going to be successful. Lean investment activity, customer preferences and the market situation of a business are the three most important factors. About 70% of the success of a strategy can be explained with all the researched factors.
Of course, some of these nine factors are pretty straight forward. Others are hard to influence. And at least to me, two are very surprising.
The factors of a successful strategy
It is natural, that you might think that the factors found by research give you „the answer“. Unfortunately, they won‘t tell you in advance what the right strategy is. What they can provide you with is a sense of the boundaries. Successful strategies have a lot in common and, probably to the surprise of many, focus a lot on common sense in a business.
The study that I would like to focus on, is the PIMS study. It stands for Profit Impact of Market Strategy and is one of the most comprehensive data collection (reaching back to the 1960s) of business performance and market information.
These are the conclusions the PIMS Associates drew from that data. You can read for yourself if you follow the link.
But let‘s move on and look at the factors that tell you what a successful strategy is made of. (By the way, the factors are sorted according to declining impact.)
Keep your investments lean
The factor is called Asset Utilisation in the paper and describes the finding that the more capital you employ the less profitable a company tends to become. Of course, there are nuances.
However, I see it as a kind of warning that a succesful strategy shouldn’t include going on an expansion binge just for the sake of expanding. There is an upper limit for healthy growth. Usually profitability declines after this point despite further growth. Basically, this factor tells you to utilise your assets already in place to the maximum before making more (conservative) investments.
Of course, it‘s possible to be successful in a capital intensive field. But the study clearifies for us that there is a limit, of how successful we can be, which is set by how well we use our investments.
Focus on what customers want
I was absolutely surprised that “Customer preference“ came in second. If someboday would have asked, I would have bet that a successful strategy‘s number one factor is „how happy can we make the customer“. But what does this tell us?
To the degree you are able to deliver the non-price attributes that your customer group wants, your business performance will go up. Of course, this applies relative to your competition, meaning you can deliver everything the buyer wants, but if the competition does it better, you don‘t get the sale. Hence, a successful strategy needs to focus on what can be done differently in comparison to the competition. (Even though it might not be the first factor…)
Another lesson from the fact that customer needs come in second place is that you have more impact on the business succes than is generally believed. You can‘t always influence what happens in the buyers head. However, you can always influence your investment plan and behaviour (first factor), as it is more of an internal topic.
Choose your market wisely
The third factor is market position. It states that your chosen market and your position relative to your three largest competitors determine influence your profitability. So, the being first or second in a market is important but only half of this factor. The second part is the market itself. It determines the profitability of your business as it „sets“ up certain costs everybody in the market has to pay, i.e. marketing, staff, rent and so on. A strategy needs to take that into account and choose the right market or build up a cost advantage for example.
So far, we had the three most influencial factors. Although, there are more to come, I consider these a kind of focus point for every business owner who aims for profitability.
Focus your product line and customer portfolio
In the PIMS study this part is called „Managing complexity“. What it is trying to convey, is that the more products you offer and the more kinds of customers (I mean the number of „kinds“, not the number of customers) you try to serve, the more complex your work becomes. And of course, the more complex your work is, the more profits go down the drain.
Find the right people
As your business grows or undergoes major changes you need people who are creative and can adapt. In a stable environment with less growth you need disciplin to keep the company lean. I am not suggesting that you change all your staff. I mean that you should find people who can work in both environments. To me, this factor seems really hard to implement. I suppose, it will take a lot of time testing how to find the right people in real life.
Innovate when you are in a strong position
That was the second surprise to me. When your company has a strong market position, strategic innovation is needed and has a positive effect on your profits. However, when you are in a weak position, it usually creates revenue growth but no profit growth (it can even hurt existing profits),
Try focussing on small accounts
If your strategy focus is on large account customers, you give away a lot of bargaining power. Large accounts tend to demand high discounts and extras. Both have a negative impact on profits.
Growth of your market
To strategically choose a growing market is the right way foward, generally speaking. The study and experience state that your sales and profits will grow alongside. However, usually margins (profits as percentage) tend to not grow. And free cash flow is usually impacted negatively as marketing investments are needed to keep up with market growth.
Make in stable markets, buy in unstable markets
If your business is in a stable market, a strategy of vertically integrating parts of your supply chain shows a positive impact on profits. In unstable markets (rapidly growing, declining, re-organising after major change) the strategy should favour buying decisions to be successful.
Extra – strategic analysis
So, a strategy is going to be successful if it contains the following rules
- investments are used fully before new ones are made
- the activities are aimed at differentiating the offer from the competition
- the market segment is chosen, so it is feasable to become number one or two
- a clear and stable product line is offered to one or two kinds of customers
- the „ideal“ employee is either found or formed through HR strategy
- innovation is a part of everyday business as soon as the company is in a strong position (but stopped when not)
- a single customer relationship is not allowed above a certain percentage of total revenue (to keep bargaining power on even keel)
- growing markets are only entered with enough financing and
- in stable markets integrating parts of the supply chain is considered.
To find a strategy that considers these rules a comprehensive (and I mean „as thorough as it can possibly be“) analysis has to be the first step. And this is my conclusion:
What makes strategy successful?
An analysis that allows you to make the right decisions.
In most cases the factors mirror common business logic. However, it can be tricky to think through all the implications of a single business decision. Therefore, I wrote down a short framework for designing a strategy that provides a reference regarding the inner logic of a strategy. You can find it in my article “What are the 6 steps to strategy formulation?“.
If you don‘t want to start with the heavy stuff, I recommend you read up on “What is a good strategic plan?“. The principles of strategy are in there, too. It is just more written with the intent of a general explaination.
Of course, to make a strategy successful one also has to implement it…. Which is probably ten times as hard, as designing the right one. 😉