The Five Components of a Business Strategy
Can you define exactly what makes up a business strategy? Some people say no, but we think you can. In fact, we believe a valid business strategy has five components:
1.) Your company’s current or desired core competencies
2.) A description of how you will differentiate vs. competitors
3.) The industry or industries in which you intend to compete
4.) The initiatives you plan to implement in the areas of marketing, operations, information technology, finance and organizational development
5.) A financial forecast that shows how your plans will meet stakeholder requirements over the next three to five years
Let’s look at each of these components. The first component of a valid business strategy is a clear description of your company’s current or desired core competencies. You may be thinking, “Great, but what’s a ‘core competency?'” While there are many definitions.
Here’s a good one from Wikipedia: “A core competency is something that a firm can do well and that meets the following three conditions:
• It provides consumer benefits
• It is not easy for competitors to imitate
• It can be leveraged widely to many products and markets
A core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers. It may also include product development or culture, such as employee dedication.” For example, we could say that Southwest Airlines is a reliable airline that offers low fares. But in order to provide those benefits, it has to have certain “core competencies,” important capabilities that enable it to have low fares and to be reliable. We believe that Southwest Airlines has four core competencies that it executes so well that it regularly beats all other US airlines in terms of profitability.
These core competencies are:
• The lowest operating costs per plane
• An economical point-to-point airport network
• A fanatical culture focused on customer service and cost savings
• An ability to keep planes in the air more of the time than its competitors
Southwest airlines couldn’t offer the benefits of low prices and reliable service if it didn’t master these core competencies. What key benefits do you want to offer your customers? What core competencies do you need to master to provide them?
The second component of a valid business strategy is a description of how you differentiate vs. competitors. In our experience, differentiation is about being the best at something. This should be encapsulated in your mission statement – what are your company’s aspirations and how are you going to beat the competition? We just talked about how Southwest Airlines differentiates — what are you going to offer customers that will make them choose your products or services so that you can grow your business? It takes a lot of hard work to come up with a great answer to this question and even more work to make that differentiation real. It’s easy for us to say that Southwest is the best low-cost airline in the US, but it’s extraordinarily difficult for them to pull it off.
The third component of a valid business strategy is a description of the industry or industries in which you intend to compete. You need to be able to define just what kind of company you are – are you a furniture manufacturer? A gift card retailer? A consulting firm, a bearings distributor, a toy importer, etc.? This step sounds easy but we find that companies are often so concerned about getting too narrow in their focus that they fail to become really clear about what they want to do. A company with a good business strategy will have thought through these issues and made the hard decisions necessary to clarify its identity. If it has, it can easily pass the litmus test of identifying the industry or industries in which it operates.
The fourth component of a business strategy is the set of initiatives you plan to implement in the areas of marketing, operations, information technology, finance and organizational development. These are the plans that guide your company’s focus and resource allocation over the next several years. If your business strategy is specific enough to be relevant, you will have detailed plans in all of these areas.
The fifth component of a business strategy is a financial plan that forecasts the results you expect to get from your plans and illustrates how they will meet stakeholder requirements over the next 3 to 5 years. Your strategic planning process cannot be separated from your annual budget process. In the vast majority of companies, if it’s not in the budget, it doesn’t exist. That’s why you have to have a very senior financial person on your strategic planning team, preferably the CFO. During the planning process, your team must compile a financial plan that estimates the results of implementing your strategy.
This plan needs to earn the approval of your company’s management and board and should be reviewed on a regular basis to track results and make refinements. So – those are the five components of a valid business strategy. Good luck planning your success. And succeeding because you plan.