The foundations of business strategy
This is the first in a compilation of stories drawn from my learnings on the Fundamentals of Business Strategy from the University of Virginia’s course.
Before getting too deep on what the strategy is about, and how to reach an effective and efficient business strategy, we should understand the foundations of it. That means, what is a business strategy? Which tools should we apply to reach it? So.. let's start from the beginning.
What is Business Strategy?
Strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it intends to be, and the nature of the economic and noneconomic contribution it intends to make to its shareholders, employees, customers, and communities.
How does one assess a business strategy? Let me introduce first, the concept of a strategic analysis. We define strategic analysis as the assessment of an organization’s current competitive position and the identification of valuable competitive positions in the future and how to achieve them.
The Strategist’s Challenge
When doing a strategic analysis, the strategist needs to ask three fundamental questions. In the intersection of the 3 questions, we have the Valuable Competitive Position, in which the strategy will be effective.
The first question we should ask is what are the values, the mission and the scope of the organization?
The second thing we should ask is about opportunities. What does the market value? What does the market demand? Are there other companies providing the same, which we will compete with?
The last thing is about the company itself. What does the company do well? What are their capabilities? What are their assets that they might have that they can leverage to meet market opportunities?
The Fundamental Principle Business Strategy
If everyone can do it, it’s difficult to create and capture value from it.
In perfectly competitive markets, no firm realizes economic profits. We define economic profits as those returns in excess of the opportunity cost of capital.
However, in the real world, product markets are rarely perfect and firms often have competitive advantage. The role of the strategist is to identify these potential sources of competitive advantage, and define a strategy to achieve and maintain that advantage.
Broadly speaking, firms may capture these economic profits in one of two ways, either through barriers to competition or through barriers to imitation.
The Strategist Toolkit
As a strategist, there are some tools that can be used to define and analyse a strategy.
The SWOT Analysis
The SWOT analysis — or SWOT matrix — is a strategic planning technique used to help a person or organization identify strengths, weaknesses, opportunities, and threats related to business competition.
The Competitor Analysis
The Competitor analysis in marketing and strategic management is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats.
Profiling combines all of the relevant sources of competitor analysis into one framework in the support of efficient and effective strategy formulation, implementation, monitoring and adjustment.
The Environmental Analysis
The Environmental Analysis is a process to identify all the external and internal elements, which can affect the organization’s performance. The analysis entails assessing the level of threat or opportunity the factors might present.
It includes the analysis of items as:
- Demographic trends
- Socio-cultural influences
- Technological developments
- Macroeconomic impacts
- Political and legal pressures
- Global trade issues
