Why is it important to understand the definition of business strategy? Put simply, a business strategy is the foundation of any company or brand.
Building a successful business strategy is, however, far from easy. There many different models and theories to consider.
In this guide, we will explore what look at business strategies and models and also consider why business strategies are a vital consideration for entrepreneurs.
Business Strategy Definition
What is a business strategy? One definition suggests that a business strategy is “a firm’s high-level plan for reaching specific business objectives.”
This definition highlights the importance of setting objectives and planning; which are the core of any strategy.
However, this business strategy definition doesn’t focus on measuring the success of a strategy, or what to do when it fails.
The How To…
Another more practical business strategy definition oulines that a business strategy is “the firm’s working plan for achieving its vision, prioritising objectives, competing successfully, and optimising financial performance with its business model.” It continues: “when the high-level strategy fails, however, the firm must either change its approach or prepare to go out of business.”
This highlights the importance of 1) setting objectives 2) planning 3) metrics that measure success. These are the three pillars of any business strategy.
Another business strategy definition tackles another side, that is answering questions. It stresses that a business strategy should answer these questions:
- Why is the company in business?
- What is our core strength?
- Which customers should we continue to serve or start serving?
- Which products/services should we stop offering, continue to offer, or start offering?
- Why have we decided on these strategic directions?
The answers to these questions would represent the direction the company is heading towards and what motivates that direction. That “direction” is another business strategy definition.
Business Strategy Definition: Why Do You Need One?
A Demanding Market
We’ve looked at business strategy, but it’s not clear yet why it is essential for every business to have a strategy.
For obvious reasons, random-thinking and successful business do not go together. In fact, according to one study, the failure rate of all U.S. companies after five years was over 50 percent, and over 70 percent after 10 years.
This tells you that it takes scientific, in-depth, and strategic planning to keep a business alive in today’s mass market. The competition of endless variety of products and customers’ high expectations make it hard for small and medium-sized businesses to prove themselves quickly.
Therefore, every step must follow a strategy and be based on real insight.
The Need for a Brand
For a business to prove itself quickly and disrupt the industry it operates on, building a brand is a requirement. Customers, especially millennials, always choose a brand that they trust and recognise. So, to motivate them to try a new service or product, or switch to another company, there must be a valid reason.
A main valid reason could be a strong brand presence. A new business cannot survive without a brand nowadays, and building a brand requires a business strategy. A solid brand has values, core competencies, and a promise. All of these brand components must be aligned with the business strategy in its entirety.
In other words, you can’t build a brand without building a business strategy first.
An Anchor for the Business
Business strategy includes metrics that measure the success of the company. These metrics are what redirects the company if it loses its track. Comparing the business’s performance on a quarterly basis with the business strategy is the only way to find out how far it has come, and whether it’s moving in the right direction. The business strategy anchors the company to its core objectives, no matter how far it drifts away.
Aspects of Business Strategy Definition
1- Business Objectives
A business strategy should reflect the company’s strengths, weaknesses, resources, and opportunities. Many strategists do not start with formulating one before they conduct a SWOT analysis of the company and the industry. One needs to deeply understand the industry before setting goals and business objectives.
The objectives need to be realistic and set based on deep understanding of the market. This understanding requires research and analysis of the competition, the target segment, the product or service attributes, and all that will surround the business.
Having irrelevant or unrealistic business objectives impacts the entire business strategy. Objectives are the guiding compass or the destination the business is aiming to reach. If the destination is in the middle of nowhere, reaching it won’t be beneficial.
The Difference between Business Objectives and Goals
Although objectives and goals are used interchangeably, they slightly differ in the business strategy definition. A goal is a general statement of what you want to achieve. More specifically, a goal is a milestone(s) in the process of implementing a strategy. Examples of business goals are: capture a bigger market share or provide better customer service.
On the other hand, an objective turns a goal’s general statement of what is to be accomplished into a statement of what exactly will be happening and when it will be achieved. Objectives must be specific, quantifiable, realistic and time-sensitive. For example, the two goals mentioned above could be translated into objectives like: increase market share by 10 percent over the next three years or reduce the call-back time of customer inquiries and questions to no more than four hours.
2- Vision and Mission Statements
Many consider vision and mission statements secondary or only good for corporations, they couldn’t be more wrong. It is true that every huge corporate has a vision and mission that evolve with time, however, it is smaller businesses who need them the most.
Larger companies have already cut a long path towards many of their goals. Their employees, as well as their customers, know where they are heading and are familiar with the culture.
On the contrary, start-ups can find themselves stumbling along. They always face challenging situations where making the right decision needs guidance provided by the vision and mission.
What Is a Vision?
“A vision statement captures in writing the essence of where you want to take your business and can inspire you and your staff to reach your goals.” Of course, it should be relevant to the nature of your business and the selected business objectives.
If you’re start-up or a company hoping for grabbing the attention of investors, the vision statement is your chance to impress and distinguish your company from others. A solid vision means a solid business.
A great example would be Microsoft’s original vision statement: There will be a personal computer on every desk running Microsoft software. Now imagine, you don’t know anything about Microsoft and you hear this statement, how would you feel about the business? One word: confident. That’s how you get people to believe in your business.
What Is a Mission?
The mission has a slightly different purpose than the vision. The mission statement is a “general statement of how the vision will be achieved. The mission statement is an action statement that usually begins with the word “to”.” This definition clarifies that the vision inspires the mission; the latter must have a verb; an action.
For instance, if the vision of a business is “A successful family dairy business”, the mission could be something like “To provide unique and high-quality dairy products to local consumers.”
A good example of a mission statement is IKEA’s “to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.”
How Can the Vision and Mission Give Guidance?
Turning Company Culture into Employee Action
Cultural norms are the behaviours that employees cite when they take actions. They are fundamental to employee motivation as they give guidance to what matters most to the company they work for.
HR departments usually train their employees to have general skills like time management or being productive, however, they do not focus on a differentiating skill. If all companies teach their workforce the same skills, what would differentiate each company?
This is the purpose of having vision and mission statements. They shouldn’t be boring, or cliché slogans. They should be transformed into every-day actions.
For instance, Starbucks mission is “To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” This reflects in the personalisation of every cup of coffee sold with the name of the customer on it. That’s how the company culture guides its employees to make decisions.
A well-communicated vision and mission should guide the customer to the right business that meets their needs. If a customer wants the best customer service, he/she can go to company X, but if the customer wants the fastest delivery, they should choose company Y.
This is why the differentiator should be at display; it speaks to the needs of the target audience.
When customers view companies as “they are all the same”, they will choose based on price. Any business should always avoid that.
Plus, today, customers are becoming more interested in doing business with companies who share their same values and vision. This has led many companies to reconsider their business strategies and mission. For example, some companies altered their products to be eco-friendly or cruelty free to be aligned with their vision of promoting “safety”.
3- Multiple Strategies
A business strategy is an umbrella term that many other strategies fall under. In fact, there’s a long list of strategies that big corporations include in their business strategy. Some examples of these? Product strategy, operational strategy, advertising strategy, and competitive strategy. While those may be less visible in small and medium-sized companies, they are essential in corporate business strategies.
For smaller companies, the main strategies would be value proposition, pricing strategy, growth strategy, and marketing strategy.
According to Investopedia, value proposition “refers to business or marketing statement that a company uses to summarise why a consumer should buy a product or a service.” While this doesn’t seem like a difficult part of the business strategy definition, it is essential for businesses in a beginner or an intermediate phase.
In these phases, a new product or service is being introduced to the market. Therefore, a need must be created by convincing potential consumers how this product or service is able to make their lives better. In other words, you need to explain why they should bother and try your new product.
Value proposition takes effort and a strategy to build, but above all, value proposition is a promise made to the target segment.
Without a pricing strategy, there is no business. It is the most influential part of your business strategy definition. Determining the optimal price is a mixture of art and science. Since pricing is a bit tricky, and highly risky, you need to be creative, careful, and scientific about your strategy.
Market research is key to understand the willingness to pay of different market segments when compared to the value proposed by your product. Remember that prices could differ according to price discrimination strategy. That means that prices may change depending on time, place, customer, use, etc.
In addition, successful businesses also coordinate their pricing strategy with their goals. For instance, when your goal is gaining the highest market share, you may need to lower the prices. Meanwhile, if your goal is maximising profits, then you should calculate the highest price that guarantees a high demand and the highest profit.
Pricing strategy is the most sensitive part of any business plan; therefore, it is a powerful tool that you can use for the benefit of your business.
Growth strategy is a strategy aimed at winning larger market share, even at the expense of short-term earnings. A growth strategy is different than a marketing strategy and it’s important for any business, but for growing businesses, it’s far more crucial.
For instance, Amazon consistently lost money for its first several years as a public company. It wasn’t till the end of 2001 that the company made profit. This is because Bezos, the company’s CEO, believed that investing in the growth strategy of the company is more important than making profit.
The Four Different Growth Strategies
There are four main growth strategies: product development, market development, market penetration, and diversification.
Product development is the strategy that deals with innovating new products for an existing market. Adopting this strategy means that the business knows the target consumers very well and aims to distribute a new concept that speaks to the needs of this segment.
Market development growth strategy entails selling current products in a new market. There several reasons why a company may consider a market expansion strategy. One reason could be that there is no room for growth within the current market due to competition.
A company may also consider market development when it expands the use of the product itself. Meaning, if a certain product targets individuals and then finds out that the product could be used by businesses, it’s a shape of market development.
Third is market penetration which aims for selling existing products to the same current market it sells to. Market penetration is often implemented through increasing market share or upselling, and it’s most common in mature markets.
Finally, there’s the diversification growth strategy which is expanding with a new product to a new market. This is surely the most challenging and holds the highest risk. Any company that decided to use the diversification strategy should conduct a reliable market research to avoid financial loss.
According to Investopedia, a marketing strategy is “a business’s overall game plan for reaching people and turning them into customers of the product or service that the business provides.”
Developing a marketing strategy is no easy task as it has many details. Most importantly, the company has to think of the business’s character; the brand. The brand includes tone, visual aspect, key messages and communication, and all other touchpoints with a certain target consumer.
Most small and medium sized companies hire a marketing agency or a specialist to take care of their marketing strategy since it is crucial to the success of the business. Strong communication is the main method to drive more customers and sales to the business.
See Also: Online Marketing Strategy
How to Protect Your Business Strategy?
Most companies realise the importance of a business strategy and are determined to develop their own. However, it is often forgotten and left behind in the hectic and demanding atmosphere of daily business life.
What happens after a while, especially in starting companies, is that daily demands direct the business and not the strategy.
It is good to listen to the needs of the business, and it’s allowed to revise the business strategy. But, you shouldn’t be driven by impulsive demands that take you astray from a clear vision to the unknown.
Here are some things that a business can do to protect its business strategy and maximise its efficiency:
The only way to turn your business strategy definition from a theory to a visible reality is through communication. Communication has different channels and different recipients.
Communication with Employees
The first recipient a business should communicate the strategy with is its employees. If you see your employees as merely people working for you, you need to reconsider your views. Employees are your first brand ambassadors. They are the ones who are in direct contact with your brand, vision, and values daily.
Every employee has the potential to make or break your business strategy through decisions, impressions, interactions, and performance.
For that reason, successful companies understand that employees are the most valuable asset a business owns. They hire employees whose vision and values match those of the company.
The business strategy must be clear to employees from day one. They have to know where the company is heading and what its priorities are. Without your employees’ help, a business strategy will never be executed.
Communication with Stakeholders
This is crucial for introducing your company to investors, sponsors, and partners. The basis of any financial investment is trust. For start-ups and medium sized businesses who don’t have a long history of achievements, the way to sell the business is the idea and strategy.
You need to prepare a strong presentation of your business strategy to communicate it efficiently to potential stakeholders. This is how you get them to trust the business and the management method.
Communication with Customers
While you may not need to explain your entire business strategy with your customers, there are certain parts that customers find interesting. Those include vision and mission statements, and core values.
When customers relate to the vision and core values of a business, a bond is created between the business entity and its consumers. Marketing specialists call this customer loyalty. Customer loyalty is a powerful drive behind most purchase decisions.
For example, customer loyalty is the reason why we find “Team iPhone” VS “Team Android”. Apple is particularly known for having the most faithful fan base. This is because its consumers identify with Apple’s vision and values.
Training and Enabling Employees
Business strategy training is part of employee communication. The difference lies in the process being more formal and action-oriented rather than merely communicative. The goal of giving employees a business strategy training is to change the business strategy from something that employees memorise to a motive that directs their actual performance.
Management and HR should give insight to employees on how they can contribute to the business strategy through their different job roles.
Training makes acting according to the business strategy definition loud and clear. For that reason, your policies have to enable your employees to take the right decisions.
For example, if the strategy’s priority is to put customers first, then your customer service representatives must have the authority and freedom to solve customers’ issues seamlessly. Having a long or a rigid policy demolishes your objectives.
Many companies which have innovation and creativity as core values don’t really practice what they preach, or even worse; punish their employees for thinking outside the box. This detracts from your business strategy’s credibility from the employees’ point of view.
To protect your business strategy, you must ensure you don’t have any internal policies that hinder its development.
Consistency and Reward
Companies tend to lose focus on the business strategy; then soon, it becomes an old faded subject. This happens when the business strategy definition is not embedded in the company culture.
This means there’s no consistency in communication or training, and no real tracking for how much is achieved or how much is left. Objectives, values, and mission become slogans that have no real impact.
To avoid this scenario, you need to interweave the strategy with the Key Performance Indicators (KPIs). Rewarding actions that contribute to the success of the vision and strategy is the most important motive for employees.
Rewards could be through gifts, recognition, or even a monthly title. Regardless of the reward’s shape, the most important part is to be consistent and to highlight that the company rewards those who follow the business strategy definition and culture.
Business Strategy Definition: Models
Perhaps analysing all the business aspects and coming up with an analysis and an action plan to improve is a hectic job. However, there are many models and theories that should facilitate this process and come up with focused results.
Here are some models that help you build and evaluate specific strategies:
To Conduct a General Analysis: SWOT Analysis
SWOT Analysis is perhaps the most popular analysis to conduct for building any strategy. It has several uses and it works for different departments of any business: IT and software, marketing, sales, human resources, etc.
As the name implies, SWOT deals with analysing strengths, weaknesses, opportunities, and threats. It is a foundational assessment model that measures what an organisation can and cannot do, and its potential opportunities and threats.
Strengths and Weaknesses
While strengths and weaknesses are internal factors which the company can control, opportunities and threats are external factors which the company cannot control but should always be prepared with strategies that make the most of these opportunities and handle threats efficiently.
Internally, strengths could be a strong brand image, friendly customer service, or a top-notch staff, on the other hand, weaknesses could be high turnover or rigid internal policies.
Opportunities and Threats
As for opportunities, those could be current trends in the market that relate to your business. For example, an opportunity for restaurants could be the trend that many consumers are interested in healthy, green foods. This means that they can benefit by adding new items and products that suit the trend and ultimately increase their sales.
Threats, in contrast, are unfortunate events or issues that may arise. Threats could be political or economical instability, or they could be natural phenomena that take place. Threats could also be in the form of digital disruption or a new competitor stealing the show. Any uncontrolled issues that could harm the business or prevent it from operating are considered threats.
To Analyse Competition Strategy: Porter Five Forces Model
Observing competitors and analysing the industry’s market are basic steps for any business to build a business strategy. The Porter Five Forces model studies that from an interesting perspective.
The model suggests that there are five factors that determine how attractive a market is. By “attractive” one means the overall industry profitability.
The five forces are: 1) Threat of new entrants 2) Threat of substitute products 3) Bargaining power of customers 4) Bargaining power of suppliers 5) Industry rivalry.
Today’s market is extremely dynamic so there is always room for sudden and expected competition, changing in prices and consequently, costs as well. All products are prone to being substituted so a business should always keep up with trends regularly.
Therefore, this model should be used on a quarterly basis and the competition strategy should be highly agile.
To Analyse Product Portfolio: BCG Matrix
The BCG Matrix is a popular model to evaluate your product portfolio; also, it has a light-hearted twist! A product portfolio is the collection of all the products or services that a company offers. Portfolio planning has a major scope of impact on the business.
The BCG model categorises products into four types: 1) Cash cows 2) Dogs 3) Question marks 4) Stars. Furthermore, it categorises markets into mature markets and growing ones.
A market is mature when it reached a state of equilibrium. This means that there’s an absence of significant potential growth or a lack of innovation. Meanwhile, a growing market, also known as an emerging market, is one where demand is rapidly increasing and there are many new opportunities for new entrants.
Mature markets are stagnant, they are unlikely to change; neither for better nor for worse. Therefore, its surviving products are either profitable or not.
Going back to the products, the BCG model suggests that cash cows are everybody’s favourite. They are highly profitable products in mature, stagnant markets and they require minimal financial investment. They will almost certainly continue to be the greatest source of profit.
Dogs are quite the opposite of cash cows. Although they are man’s best friends, from an accounting point of view, dogs should be sold off. They are low market share products in a mature market. Meaning, they do not generate enough cash and they affect the overall performance of the company and waste its resources.
Stars are units with a high market share in a fast-growing market. Stars require high funding to fight the highly competitive atmosphere of a growing market. However, their high expenses are worthy of investment as their returns are also great.
A business should protect its stars and maintain their growth rate. When industry growth slows, if they remain a niche leader or are amongst the market leaders, stars become cash cows; otherwise, they become dogs due to low relative market share.
Question marks are low performing products in a growth market. Although question marks do not generate much revenue, they have potential; unlike dogs. With the right amount of investment, valuable marketing, and the proper modification approach, they can become stars.
You probably have seen many companies rebrand a specific weak product and reshape its attributes and identity, and the product immediately performs better. This is a common case of a question mark becoming a star.
Similar to stars, question marks need a lot of funds to get back on their feet. Yet, the investment is the only way to avoid question marks from becoming dogs one day.
A company with a strong product portfolio should have stars whose high share and high growth assure the future; cash cows that supply funds for that future growth; and question marks to be converted into stars with the added funds.
To Analyse Growth Strategy: Greiner Theory
Greiner described an organisational growth model for enterprises, in which he initially proposed five stages. The growth towards a next stage is accompanied by resistance, which is also referred to as growing pains.
So, a business’s growth process is composed of calm phases separated by stormy, critical situations. The growth of the business from one stage to the other depends on overcoming these situations of crisis.
Here are the 5 stages that Greiner discusses in his model:
Growth through Creativity
The Creative Phase is the starting point for any start-up. The very small team, sometimes the founder alone, thrives on the innovation of the idea or the new product the business introduces to the market. They focus on the value proposition the concept brings to its customers.
As the business grows in complexity, the start-up team finds itself dragged into too many directions; much more than they can handle. They cannot keep up with the increasing demands of the project.
Growth through Direction
At this point, the company should hire experienced managers who have worked in larger firms and are able to build strategic plans. These managers should redirect the company towards strategic planning instead of acting in a rush based on a rising demand.
Each one of these individual managers may fall into the autonomy trap. Each favours his/her own area of focus, regardless of the overall company’s benefit. If there are enough resources for everyone, this wouldn’t be a problem. However, the usual case is that the business doesn’t have enough resources for all of them.
Growth through Delegation
This autonomy crisis is overcome by dividing work and responsibilities and having a deeper hierarchy. This is the phase where middle managers appear. Experienced managers now manage managers instead of giving instructions to employees on the front line. There are individual departments and units now managed by multiple individual managers.
With delegation comes a control crisis. A disconnection between the bottom and the top of the organisation starts to cause issues. Miscommunicated plans and decisions affect the overall vision between front line employees and upper management; a gap is created.
Growth through Coordination
The response to this communication crisis is obvious. More effort and policies should be put into making sure that all parts of the company are on the same page.
Some companies hire internal communication specialists that take care of this. Meetings between different departments should always tackle coordination of efforts and the business strategy definition of the organisation as a whole.
As these policies and internal regulations are put into place, bureaucracy between different departments rise to the surface. An endless cycle of good looking papers and reports that lead nowhere hinder the progress of the organisation.
Growth through Cooperation
Bureaucracy is overcome through cooperation and stressing on the importance of human connection. In addition, internal policies should be re-written in a way that allows agility and connection instead of dispersion and heavy paperwork.
This collaboration combats internal issues and the final crisis stage is relevant to external growth. The organisation now aims to expand and grow without negatively affecting its current system.
Growth through Alliances
Alliances through merging, acquisitions, or partnership are common phenomena that one observes often at this stage.
Of course, the model doesn’t cover each and every business problem. However, these are the common issues that arise at different stages of a business’s life. At every stage, the business strategy definition should be present and modified according to the needs.
To Analyse Marketing Strategy: Marketing Mix Model
Although this is more inclined towards marketing, it could still be used as a model to evaluate your marketing strategy. The marketing mix model deals with four aspects of the business, commonly known as the four marketing P’s: 1) product 2) Price 3) Place 4) Promotion.
Product attributes need to speak to the needs of the target segment.
Price needs to be balanced to maximise demand, minimise cost, and maximise profit. Prices also need to have some variance to appeal to multiple consumer segments.
Next comes the place, or distribution channels where customers can buy your product or service. This is a crucial part for any business as any growth strategy is accompanied by expansions to multiple distribution channels; whether in traditional stores or online.
Finally, promotions are important motives to get new people to try your product and increase your market share. Promotions also help you upsell existing customers to maximise profitability.
Business Strategy Definition in a Nutshell
Let’s have a quick review of what has been covered in the article: the article tackled business strategy definition from many points of view. First, we started with three different meanings for a business strategy definition.
Then, we moved to why a strategy is important for a business, especially in today’s mass market where the need for a brand is crucial.
Next, we observed the different components of a strategy: business objectives, vision and mission, and other multiple strategies like growth, value proposition, and marketing.
The last two points were about protecting the business strategy after you have built it and the different models that help build and evaluate a business strategy. The models discussed were: SWOT analysis, Porter Five Forces Model, BCG Matrix, Greiner Theory, and the Marketing Mix Model.