Why is business strategy important?

Devising a business strategy is hard work. And as a business owner myself, at a point I wondered if I actually need a strategy and if it‘s really that important.

A business strategy is important, because it provides a guideline on what to focus. A strategy directs the actions of an organisation and explains how to compete in a market. It connects business goals, market situation (chances and threats) and competitive advantages (strengths and weaknesses).

Of course, behind this short answer, there are a few mechanisms at work that can provide a competitive edge for a company.

What is important in a business?

When you start a business (or overhaul it), you have endless options to choose from, regarding questions like:

  • What product/service do we want to provide?
  • Who is our ideal customer?
  • Which competitors do we want to go up against?
  • How should we compete?

It is the task of the leader to decide what the answers are going to be. (Note: I did not say that a leader has to come up with the answers, nor did I state how the decisions should be made.) If this is not done, eventually there will be an uncoordinated mix of opinions, values, competencies and favoured directions. (That is even the case in a one-person-business.)

If I were to create a list of what to tackle, it would like this:

Most important things in a business

  1. It has to be crystal clear who the perfect customer is and what value you want to provide to her. There is nothing more important to know (or to find out), since no company can or should serve everybody.
  2. Everybody needs to know exactly what needs to be done to create that value.
  3. All the activities have to be supported by a thought structure or a frame of reference that evaluates if the value for the customer is actually valuable, or if the ideal customer is the right fit. In short, a business needs a feedback mechanism to find out, if it‘s on the right track.
Most important things in a business

How do strategies affect the success of a business?

A business strategy narrows the focus by choosing a direction for all activities and committing resources to achieve critical objectives for long-term success. The effect is that most options of what and how to do, are to be ignored, in order to make a significant difference in the chosen areas.

This narrowing done on a few critical activities and objectives is necessary, because the resources in a business are finite. To pursue everything and „keeping options open“ means to spread thin the effort. In today‘s competitive landscape, no business stands a chance with even half the effort, let alone 20%, because there are 5 objectives pursued simultaneously.

By the way, I also wrote an article about „What makes strategy successful?“. It looks at the factors you should think about when designing a strategy and helps you in finding the right strategic direction.

Apart from the focus of resources, there are a few general ways in which strategies affect the success of a business. These usually include (of course not for all the companies under all conditions):

  • a steeper learning curve in the chosen activities
  • the build up of brand equity, through better delivering of what customers want
  • an insulation effect (not complete insulation) against some market forces by occupying a defendable strategic position
  • above average returns if the „strategic bet“ is won
  • higher motivation among employees, when they know what, how and why something is to be done
  • long-term success through the build up of competitive advantages

There are many more effects of strategies on businesses. In my view, it is fair to summarise, that the right strategy gives a company a competitive edge that dramatically increases the likelihood of prosperity under almost any market condition.

What strategy to use?

The big question, of course, is what is the right strategy. And the answer has to be „a unique one“. If a strategy isn‘t unique, it can‘t provide the company with an idea of how to create a competitive advantage. Since there cannot be such an advantage, if a second firm builds the same thing.

However, strategies can be generally categorised. That helps us to understand, what directions a company can choose. Probably, the most known concept consists of Michael Porter‘s three generic strategies: cost leadership, differentiation and focus (or niche strategy).

The effectiveness of each strategy type depends on the market situation (external factors) and the strengths and weaknesses (internal factors) that a company brings to the table.

Because I wrote a post about „When differentiation strategy works best“ already, I only go into a little detail regarding the other two types.

Strategy of cost leadership

This strategy is most useful when the company competes in a mass market and has the means to consistently keep the production costs lower than its competitors. The mentioned means are usually some kind of hard to copy advantage in technology, process or material. But it could also be due to a location (less transport cost) or a form of access that nobody else has (for example, having a business unit vertically integrated that provides necessary materials that others have to buy externally).

Strategy of focus

Focus is applied when targeting a submarket. Usually, it comes along with a high degree of specialisation. Often, it also includes focussing on a very specific buyer group. 

This kind of strategy is usually adapted by small businesses that cannot cover the mass market. 

Depending on the competitive landscape, normally there are also tendencies towards cost leadership and differentiation within a focus strategy.

Personal view on the importance of strategy

On an anecdotal note, I can say, that since I developed my „inner strategist“ I gained a lot of clarity in my business ventures. I wouldn‘t say it gets easier. But I surely see more clearly what the right and wrong decisions are. (As I said, it‘s still hard to do the right thing… 😇)

If you want to get started with working on strategy in your small business, I can highly recommend „Good Strategy/Bad Strategy“ by Richard Rumelt.

It doesn‘t overload the topic with global player buzzwords and focuses on strategy in general, not just in a business setting. It actually helped me understand what all the other strategy books meant.

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