The Ultimate Guide to Strategic Planning

“All men can see the tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved” – Sun Tzu, The Art of War

This quote comes from the first book ever written about strategy and it capture the essence of why strategic planning is important. Victory (or success) evolves from strategy. Yet, we often admire success but rarely consider the design behind it. In this guide we are going to show you how this design works and how can you come up with your own design of success.

Amid the current chaotic business landscape, a high-quality product or service is not sufficient to overtake competitors and gain competitive advantage. It takes more than that to differentiate yourself from the clutter. What you will need is a well-crafted strategy that takes into account the company’s aspiration, the external environment, and your capabilities.

We start this guide in Section 1 with an introduction to what makes a strategy good and what you need to end up with in order to say you now have a strategy that will lead you to success.

Section 2 identifies the design of purpose as the starting point of strategic planning and how can you conceptualize this with a mission statement. We will also show you how to avoid committing to an ill designed mission that is doomed to fail.

Section 3 discusses three different strategic paths choices and highlight the importance of understanding the tradeoffs you must face in order to follow one of the paths and stick to it. Coherent strategic choices significantly increase your chances of success.

Before going on to crafting a winning business strategy, we first lay its foundation by listing the four sources of strategic advantage in sections 4, 5, 6, and 7 and how they constitute the main drivers of your business strategy.

In Section 4, you will look outwards and learn how to design your strategy to take full advantage of the prevailing market structure. We will discuss the 5 forces that shape your market so that you can navigate your way around them.

We then turn to look inwards in Section 5 and focus on internal resources. We show how your strategic plan needs focus on 4 important attributes of your resources. Since we cannot invest our time and effort in everything, this will help in choosing the resources and capabilities to invest in to maximize your strategic advantage.

In Section 6, we help you look sideways and learn how to drive an advantage form your business ecosystem.

Since we already looked outwards, inwards, and sideways; it is time to look out of the box and make breaking the rules part of your strategic planning. This is what we do in Section 7 and we offer a very helpful tool for designing an innovative business strategy.

Now that you are armed with a holistic strategic perspective, let’s move to Section 8 and craft your winning strategy on a page. We firmly believe that if you need more than a one-page strategy, then you don’t have a strategy. In this section, you will learn what components go on that page and how to combine them for maximum benefit.

In Section 9, you will learn how to analyze your resulting strategic situation in order to adjust and optimize your business model

We put it all together in Section 10 by learning how can you take your business model on a “Road Test” before implementing it.

Since we are writing about strategy, we start every section by paying tribute to Sun Tzu, the first person to ever write about the topic some 5000 years ago. We do that by borrowing a quote from the Art of War that summarizes the essence of the section.

1 – What is Strategic Planning and Why is it Important?

“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win” Sun Tzu, The Art of War

What is strategy?

In the broadest sense, a strategy is your plan of how you are going to achieve some mission. To be more specific, strategy is made up of 3 sets:

A set of guiding principles or core values
A set of coherent actions to achieve our mission in the best possible way
A set of identifiable trade-offs that you need to make in order to execute the identified actions

The items in the 3 sets need to be different from other companies 3 sets. If you do the same things as your competitors, then you don’t have a strategy. For instance, Southwest airlines decided to serve low-cost customers. In doing so, it had to pursue activities which were different from its competitors.

Strategy must not be something difficult to explain. It is always almost simple to explain strategy without many matrices or charts. Good leaders identify one or two critical challenges and focus all their attention and resources on concrete action to overcome those challenges.

What isn’t strategy?

Most managers make the mistake to consider operational efficiency as strategy. Operational efficiency is not strategy. It is often easy for the managers to pursue operational efficiency as there is a definitive goal and there is immense satisfaction in accomplishing that goal. So, very often managers get caught in the trap of “operational efficiency” by mistaking it for strategy. They pursue improvements in several different areas without focusing on the strategy.

Why the Japanese rarely have a strategy?

The Japanese have always been excellent at quality improvements in pursuing initiatives like quality circles and TQM. They were able to win the business battles without having any definite strategy because the others were far behind them in terms of quality. However, when the Koreans and other Asian Tiger economies caught up with them in terms of quality, the Japanese started losing badly for the want of a strategy.

2 – Business Strategy Starts with Purpose and Succeeds with Focus

“Amid the turmoil and tumult of battle, there may be seeming disorder and yet no real disorder at all” – Sun Tzu, The Art of War

Strategy Starts with Purpose. The purpose should be to solve a problem or serve a customer need. Once identified, you should focus all your resources in being the best at solving this problem or satisfying this need.

The story behind: The fox and the hedgehog

It goes without saying that foxes are agile, dynamic animals that are capable of concentrating in multiple things at a time. They are aware of their environment and what is going on around them, while also focusing on their prey; the hedgehog. On the contrary, the hedgehog can only do one thing at a time; curl up into a ball and protect itself with its spikes. This paradigm illustrates companies that pursue many ends at a single time versus companies that simplify complexity and pursue only a single basic principle.

The three circles

Jim Collins has digged down into this problem and has discussed the solution to the problem in his book ‘Good to Great’ published in 2001with the Hedgehog concept. In his book Collins argues that success is all about simplicity and solid principles. The author claims that businesses can only succeed only if they focus at one thing at a time, without overcomplicating business operations

According to Collins, the Hedgehog concept is principles on the understating of three overlapping circle:

Circle 1: What are you deeply passionate about?

The first question is all about looking into and identifying what the organization is passionate about. You need to uncover what ignites your employees and understand in what area their passion lies. At this stage you need to ask:

What really matters to your employees? What do they enjoy doing?
What does your organization aspire?
What are the values that describe your organization best?

Circle 2: What can you be the best in the world at?

The second question looks into another topic and sees to uncover what your company is best at. At this step, you need to understand where your current and potential core capabilities and competencies lie.

What makes you differ from your competition?
What are your core competencies? Are they fully utilized?
What are your weaknesses?

Circle 3: What drives your economic engine?

The last question that needs to be asked is what drives your revenue and profit up. This insight will identify where the potential for competitive advantage lies. You need to consider:

What is the primary source of revenue and profit?
What area of the business drives economic progress?

Overlap

Having examined all three questions above you will then need to identify where the three circles overlap. The point they overlap is where the Hedgehog concept is and once identified you can become aware where the central vision of your organizational strategy is. The Hedgehog concept is very beneficial for reviewing and assessing their current strategy against where the organization’s passion and economic opportunities. After identifying the gaps, businesses can then proceed to revise their strategy accordingly.

How to focus your purpose

To illustrate the danger of focusing on a product, consider the following mission statement:

“We strive to become the biggest producer of steam locomotives in the world”

Having this mission statement would have resulted that you are long out of business by now. But regardless, let’s dissect this statement in order to see the danger of focusing your strategy on a product.

Products are just a means to an end. Customers don’t buy a product because they want it. They buy it because they want something out of it. Because of this, they will switch to a product that better serves their need. Now given the pace in which technology is advancing, you can safely assume that something will come out that better serve the need of your customer.

Additionally, the focus on the product will drive your “innovation” in a direction that make the product better, i.e. better steam locomotives. While incremental improvements are necessary, you have killed the already small chance of making an innovative leap.

In addition to protecting the company from being wiped out by new technology, focusing on a customer widens the horizon of the organization, is an excellent starting point for brainstorming, and is an important catalyst of innovation. It enables the company to be a force of disruption in the market and not a prey of technological changes.

Lets update the steam locomotive mission statement to be about “long distance travel”. The strategic question of the company will be along the lines of “How can we improve the experience of the customer who is traveling long distances?”, “Should we make it faster or more comfortable?”. Disruptive innovation arises from answering these kinds of question. It doesn’t arise from answering “How can we make it more fuel efficient”, which is something a product focused company would ask.

Coupled with the right corporate culture, customer focus also improves the chances of someone coming a long and saying something along the lines of:

“I heard about 2 brothers who invented something called an airplane. It covers distances really fast. Since our strategy is about long-distance travel (and not steam locomotives), does anyone else think we should explore this?”

Notice that the previous statement doesn’t contradict with 2 seemingly conflicting components; flexibility and commitment. But since the strategy is committed to a customer need, satisfying it became flexible and immune to being stuck in the past. The company is aligned but also flexible

A main problem often witnessed in the business environment is when companies lose focus by taking up too many things at a time. By doing this, businesses often lose their identity and their performance starts to decline towards the bottom. Jim Collins has digged down into this problem and has discussed the solution to the problem in his book ‘Good to Great’ published in 2001with the Hedgehog concept. In his book Collins argues that success is all about simplicity and solid principles. The author claims that businesses can only succeed only if they focus at one thing at a time, without overcomplicating business operations.

What is a Mission Statement?

A Mission Statement encapsulates the company’s identified purpose. In other words, the Mission Statement is an action-oriented small piece of text that encapsulates what the organization is doing and why is going it. The Mission Statement should inspire action.

Mission statements are important because:

Creating a clear, well-defined direction for the long-term future and where the business is heading.
Providing a basis for crafting your business strategy and action planning.
Guiding employees internally by proving clear guidelines on the business approach and culture.
Establishing shared goals among the workforce and encouraging working together to achieve mutual objectives.
Communicating the business approach clearly to customers, media, suppliers and other parties.
Improving overall brand image by proving that you are professional, you are action-oriented and you have clearly-defined objectives of where you are heading.

3 – Understanding the Trade-Off in Strategy Development

“There are roads which must not be followed, armies which must be not attacked, towns which must not be besieged, positions which must not be contested” – Sun Tzu, The Art of War

One of the most prevalent models in the Strategic Marketing theory is Porter’s Generic Strategies which as its name implies was developed by Michael Porter in the early 1980s. The model attempts to examine the competitive behaviors and positioning of a firm that leads to a strategic competitive advantage. The generic strategies are positioning options plotted on two dimensions; the scope of the market and the basis of competitive advantage. Based on these, Porter has proposed three possible generic competitive strategies.

This strategic framework is helpful in describing the distinctive features and nature of strategic position at the simplest level. Advantage of this framework is that it compels us to choose between two or more strategies rather than being caught between them. This framework also allows us to choose our strategic positioning based either on needs of the customer, variety of offerings or accessibility of products. The concept is easy yet effective as a starting point in strategic planning.

Cost Leadership Strategy

As its name implies, the cost leadership strategy involves cost efficiencies through the manipulation of production costs. One way to achieve this is by casting the business as a low-cost alternative in order to attract customers, boost sales and gain market share. Another way to achieve cost efficiencies is by reducing cost in order to increase profits. Yet it is important to note that a minimum level of quality must be maintained in order to be acceptable to the customer. This strategy is especially beneficial when the customer base is price sensitive.

The first competitive position is the cost leadership and it is based on the notion that having lower costs and prices than competitors leads to a competitive advantage. This can be achieved through efficient production and distribution practices. This approach possesses high barriers to entry due to the low costs but it possesses the risk of being perceived as inferior among the industry or its business model being replicated by a competitor. An example of a cost leadership strategy is seen by Aldi and Ryanair, which remove all unnecessary activities in order to save costs and offer lower prices to the customer.

Product Differentiation Strategy

A very different approach is the Product Differentiation strategy in which a firm aims to be the highest value provider within the market. This can be achieved through high quality product and services, rigorous marketing activities, after-sales service and continuous research and innovation. On this basis of being higher valued, the business can charge higher prices than the industry average. This strategic option is primary focused on customer loyalty and retention and therefore seeks to create long-term customer relationships.

On the other hand, a firm may pursue a differentiation competitive strategy in which the firm offers a slightly or significantly differentiated offering so that it secures a premium price and higher margins. In this case, the offering is usually of higher quality and design and conveys brand attributes that are valued by the consumer. An example of a differentiation strategy is seen by Emirates airlines which although they charge a premium price, they offer far more benefits than their low cost rivals. However differentiation runs the risk of changes in customer preferences which may not value the perceived benefits as a rational trade for the increased price. It also runs the risks of easy imitation by competitors.

Focus Strategy

Porter also looks at the focus strategies as another competitive option; either in a cost focus or differentiation focus. This competitive position is a matter of competitive scope and reduces the breadth of targeting to a market niche. The cost focus is achieved through serving a smaller market on a cost leadership strategy while a differentiation focus serves a small market by following a differentiation strategy. Porter highlights that if a firm does not adopt a generic strategy, it will then become stuck in the middle and lose its competitive advantage. However, there are conflicting opinions on the matter with several opponents arguing for a hybrid strategy, employing a low cost and high quality.

While the Cost Leadership and Differentiation strategies focus on a broad customer base, the Focus strategy strives to build a competitive advantage by engaging in a smaller portion of the market. This model is based on the belief that by focusing on a narrow segment a firm can deliver better specialized service. Although penetrating a niche market might be considered risky, it often captivates customers with high loyalty and retention levels and leads to increased profits. Within the Focus strategy, there are two variants:

Cost Focus: Here, firms are aiming for a cost advantage by tapping into a narrow market segment also known as ‘niche’ market.
Differentiation Focus: Here, firms aim to provide customers a higher perceived value for their products or services, usually at a premium price. This strategy is intended for a narrowly defined market segment.

Through his work, Porter has argued that a firm’s strengths fall into one of the headings discussed above and therefore the respective positioning should be followed. Yet, the choice of strategy depends upon the firm’s strategic objectives, orientation and long-term vision. All factors must be considered in order for a business to make the right choice of a positioning strategy without being ‘stuck in the middle’, as this according to Porter’s Generic Strategies, will lead to the lack of ability to compete effectively.

Why are trade-off’s essential to sustain strategic positions and creating a strategic fit?

We now realise the critical consideration that creating a business strategy involves making a trade-off. If there is no trade off there is no strategy. Trying to be everything to everyone is not strategy. For example, following the Porter’s generic strategy framework, Vanguard Group chooses a cost leadership strategy. It operates a low-cost fund and so also does not advertise for overly high returns but moderate returns. So, even if it’s competitors in the market offer very high returns, it doesn’t make a similar promise. Neither does it employ an active fund manager by paying a skyrocketing salary and try to generate higher returns. It maintains that trade-off as all its activities revolve around its cost leadership strategy that helps it sustain its strategic position.

What happens if we keep changing strategic positions?

We may sometimes feel that we can easily change market positions by imitating a competitor. By imitating someone else’s market position, we become an imitator and a straddler. Unique strategic position is achieved by choosing to do a unique set of activities. Trade-offs involve doing more of one set of activities leading to less of another set of activities. By imitating or copying someone else’s market position you choose to do activities that may be incompatible with your current set of activities. These activities can be only done by inviting significant inefficiencies.

Strategic positioning must not be changed at will as it takes time much beyond a few business cycles to acquire a position. In the pursuit of achieving a position we must not succumb to the pressures of business cycles or other market compulsions. We go on to explain the benefits of creating a strategic fit that leads to competitive advantage for those companies. We then demonstrate how trade-off has benefitted real-world companies like Southwest Airlines sustain a strategic position to create a strategic fit and drive competitive advantage.

How long does it take to strengthen a unique strategic position?

The duration of a strategy does not begin and end with a business cycle. Strategies need to be of a longer duration and doesn’t change with the change in business cycles. Frequent changes in strategies could be counterproductive. The role of leadership is crucial in implementing a strategy. Pressure from the market players could force management to make changes in the strategies based on trends or happenings in the market. The leadership should be able to resist the pressure to change strategy midways. Accepting trade-offs creates unique market positions for a firm. Making changes to the strategy midway succumbing to the pressure from the market could mean losing crucial market positions.

4 – Market Structure Driven Strategic Planning

“If you know the enemy and know yourself, your victory will not stand in doubt; if you know Heaven and know Earth, you may make your victory complete” – Sun Tzu, The Art of War

The Market Based View (MBV) suggests that a high performance depends upon the market which you operate in. It is one of the oldest theories of strategic marketing and it still very popular nowadays. The MBV further stipulates that it is vital for the strategist to effectively address the firm’s opportunities and risks as well as the long term organizational goals and aspirations. The Market Based View originates from Mason and Bain in the 1950’s and the Structure- Conduct- Performance Paradigm, which was later on further developed by Michael Porter with theories that have marked the history of strategic thinking.

According to Porter, a firm must perform an in-depth examination of the external and macro environment in order to fully understand the underlying structure of its industry. For this reason, strategic managers must consider all the underlying competitive pressures which were analyzed by Michael Porter in the 1970s through the widespread ‘Porter’s Five Forces’ model. These 5 forces are discussed below.

Using Porter’s five forces framework to define the industry

Porter’s five forces model forces us to think about the industry from all directions thus covering the entire spectrum of our industry.

Recognizing the forces that drives industry dynamics

Michael Porters five forces model can be used to study the various players in the industry environment. The five forces that affect the extent of competition and within an industry are as follows. These factors would have an impact on willingness to pay by the customers, price prize, cost and profits.

Threat of new entrants in the market: If barriers to entry are low there will be many players would want to enter and take a share in the profits. This will reduce the profits in the industry as many players will share the same pie. Semiconductor industry is a highly capital intensive and difficult to enter unless one has extremely deep pockets. Some businesses may use a hostile pricing strategy in order to establish barriers to entry. Other barriers to entry include economies of scale, exclusive technologies, natural resources advantages, etc.

Bargaining power of buyers: If the bargaining power of buyers is high then your price would have to come down leading to lesser profits. During the period between 1997 and 2012 the PC manufacturers were the primary buyers from the semiconductor industry and mainly demanded microprocessors for their personal computers. Intel Corporation derived significant value by supplying its microprocessors to the PC industry as it was the dominant supplier in the market. This factor is mainly influenced by the number of consumers in the market, the cost of the buyer to switch to another offering, and so on.

Bargaining Power of the suppliers: If the bargaining power of suppliers is high your cost will go up and the profits will come down. Intel was a dominant player its suppliers were not in a bargaining position. This factor is affected by the number of suppliers in the market how powerful suppliers of a business are and how easy it is for them to drive prices up, which as a result would lower a firm’s profitability. For example, when there are only a few suppliers in the market, then it is highly likely that they will possess a lot of control.

Availability of substitutes: When there are close substitute products in the market, consumers are more likely to switch to alternatives when price increases. When this force is high the strategist must examine current and potential substitutes and carefully set the maximum price appropriate for its products. The business should also differentiate itself by offering high quality products and services – this way the threat of substitutes decreases.

Intensity of competitive rivalry: If the rivalry between the competitors in the industry is high the players will drive down the price leading to losses for everyone. Intel was a dominant player in its sub segment of microprocessors. There was competition in the fabless subsegment, but the intensity was not very high.

5 – Resources Driven Strategic Planning

“To lift an autumn hair is no sign of great strength; to see the sun and moon is no sign of sharp sight; to hear the noise of thunder is no sign of a quick ear” – Sun Tzu, The Art of War

The VRIO framework is a tool for strategic analysis designed to analyze the firm’s internal resources and capabilities that provide the firm with a competitive advantage. The VRIO analysis was developed by Barney (1991) and is an acronym from the initials of the attributes that a company’s resources and capabilities must possess in order to lead to a sustained competitive advantage: Valuable, Rare, Inimitable, Organization.

This in turn determines the strategic decisions to be taken and the approach to the market. As discussed above, VRIO stands for Value, Rareness, Imitability and Organization and if those attributes are satisfied then it is said that a company can achieve a sustained competitive advantage. Yet, this should not be taken for granted since a completive advantage may be influenced by other factors that are out-of-control of the firm, such as market trends and competition.

What makes the VRIO model particularly effective is its simplicity which has led to its widespread application to distinct industry scenarios. It is advised that the VRIO framework is pursued at the onset of the strategic planning process and it is important that the analysis is continually reviewed as resources and capabilities may alter over time. The VRIO analysis may be used in conjunction with other strategic tools in order to provide a thorough internal and external evaluation of the firm.

Valuable

The first attribute of the VRIO analysis asks whether a resource adds value to the organization, exploits opportunities and neutralizes competition. If the answer is yes to the above, then you can move on to the next attribute. On the other hand, if it doesn’t provide any value then the firm will struggle to attain competitive advantage.

Rare

The second attribute of the framework examines the rarity of the resources and capabilities owned by the firm. The question here is whether the organization in question controls scarce resources and capabilities that are hard to find. When a firm has access to rare resources it means that competitors cannot easily obtain it and are therefore forced to find substitutes.

Inimitable

The third attribute looks into the imitability of the resources and capabilities. If a resource is easily duplicated or an equivalent substitute can easily be found, then a firm will have trouble attaining a sustained competitive advantage. On the other hand, a rare and difficult to attain resource ensures that it is inimitable and that competitors cannot replicate it.

Organization

The last factor to be examined is whether the organization’s resources are organized to capture value. Resources themselves cannot bring a sustained competitive advantage if they are not organized. For this reason, the management systems and company culture must be aligned in order to fully support the potential of the valuable, rare and inimitable resources and capabilities.

Strategic Focus vs Strategic Flexibility

Traditionally, the resource-based view of the firm entertained the idea that firms which have unique resources are more competitive than others. This view is challenged by today’s rapid technological advancement and an increased pace of disruptive innovation. This is because, assets represent a long commitment which may be rendered less profitable because of fast technological changes. However, there are two attributes that will make an asset less exposed to redundancy.

Those 2 attributes are

Specialization and
Mobility

Specialized assets usually do one thing, but they can do it very effectively. Highly specialized assets usually have high acquisition costs because there is usually very specialized know-how involved in making these assets.

For example, a piece of machinery that is producing a product at very high level of efficiency. Despite the obvious benefit, it is risky to invest in such specialized assets as the speed in which products (which are produced by these assets) become redundant is increasing.

Hence, the more de-specialized the asset or the resource is, the better (given an adequate level of usefulness). This is because, you can switch the resource from one product to another and not lose a significant part of your investment.

This brings use to the next point, which is how easy it is to reallocate resources from product to product or generally across the organization. Resource mobility is how easy it to redeploy an asset in different situations. This is important because opportunity is time-varying and as such, the optimal use of certain assets change as well.

There is a class of assets that covers both the specialization and mobility criteria discussed above quite well. Intangible assets.

Intangible assets come in many forms. Examples include brand, relationships, knowledge, etc. Most of intangibles have both the de-specialization and the mobility traits. This means that 1) they can be redeployed for different products and 2) the cost of their redeployment is relatively low.

The best use of a de-specialized intangible would be to magnify the usefulness of other tangible and specialized assets. This will yield increased benefits from the company’s owned and outsourced capabilities. This combination will enable a company to achieve competitive advantage without the over specialization of its resource portfolio.

6 – Innovation Driven Strategic Planning

“An army may march great distances without distress, if it marches through country where the enemy is not” – Sun Tzu, The Art of War

The Blue Ocean Strategy is a marketing concept developed by by W. Chan Kimand Renée Mauborgne in 2004. The authors suggest that firms are better off exploring “uncontested market space” rather than competing in a highly saturated market contested with vicious competition. The authors refer to these new spaces as “Blue Oceans” and suggest that they provide competitive advantage by making the competition irrelevant.

Four Actions Framework

In order for a Blue Ocean to be discovered the authors bring forward the Four Actions Framework which is based on four actions :

Raise: Identify the factors that should be raised well above the industry’s standard at present.
Reduce: Look out for the factors that should be reduced well below industry standard.
Eliminate: Identify the factors that have been the source of competition within the industry up to now.
Create: Create new industry factors that have not been previously offered.

Simultaneous Differentiation and Low cost strategy

The Blue Ocean Strategy Theory suggests that a firm can at the same time pursue a differentiation and low cost strategy by identifying what consumers value and then rethinking how this value can be provided at a lower cost. This approach is referred as “value innovation” and goes in contrast with Porter’s Five Forces which is based on exploiting existing demand and competing in a contested market space.

Five Step Process

In order for the organization to escape ”Red Oceans“ and enter a new unsaturated market the authors put forward a five step process:

Get Started: The first step is all about choosing the right place to start. Selecting the right people for the Blue Ocean team is crucial.
Understand where you are now: Examine and understand the current business situation and competitive landscape.
Imaging where you could be: Explore the Blue Oceans which you could tap into and realize the size of your industry.
Find how to get there: Create a new market space by formulating a well-developed strategy and reconstructing market boundaries.
Make your move: Inthe final step of the process decide which Blue Ocean move you will pursue and roll out a fair process. People’s commitment and top management’s support are vital factors in this last step.

By following this process, the organization can eventually move out of crowded markets and therefore start creating new value for non-customers. This process can be applied to several business scenarios; from a long-established company to a non-profit organization.

The Blue Ocean Strategy is one of the few strategic planning models that has reinvented the wheel. The goal of the Blue Ocean Strategy is to encourage organizations to leave overdeveloped and contested markets, referred as “Red Oceans” and instead enter new, growing markets that are untapped by the competition. By doing this, companies can instantly gain advantage and can enjoy increased sales, fewer risks and greater success.

7 – Business Ecosystem Driven Strategic Planning

“On the ground of intersecting highways, join hands with your allies” – Sun Tzu, The Art of War

The most popular example of a business ecosystem is the Silicon Valley, California. It is a massive cluster of businesses that work at the cutting edge of technology innovations. It boasts of creating the most prolific companies, businesses and services in the last century. HP, Cisco, Intel, Microsoft, Apple, Google, Facebook, Amazon and many more, all have some sort of connection with the valley.

While one can locate the Silicon Valley ecosystem to a physical place, the technological innovations brought about by them and many like them around the world have turned the notion of an ecosystem into a more virtual, dynamic, complex and interdependent place. This place is more global and digital without any systematic territorial dimension.

Business Ecosystems, physical or virtual, recently became an important strategy driver because the we live in an age of virtual “intersecting highways”. Industry barriers are blurring, information gaps are closing, and it is becoming much easier to access resources that once constituted an entry barrier. For example, in the Silicon Valley ecosystem, it is vastly more easier to access capital for startups than anywhere else.

Characteristics of a Business Ecosystem

Opportunities to develop unique resources by leveraging the business ecosystem are abound. Different classes of connectivity-based resources and capabilities are emerging as new providers of advantage. If you can structure your offering in a way that provide an opportunity for others to also create value from your offering, you may be able to position yourself as an orchestrator of an ecosystem. Software companies like SAP and Apple have been successful of becoming ecosystems orchestrators using traditional approaches like implementation partners in the case of SAP and the App Store in the case of Apple. Others like Uber and Nestle Nespresso were also successful with more innovative approaches.

These businesses do not focus on owning many assets but work through the value of relationships and networks. They are keener on growing the market through increase in the flow of goods and people. In a business ecosystem competitor may even seek to collaborate with each other to reinforce their competitive advantages. They create and manage cooperative relationship to be able to access their complementary and scarce resources.

Forms and stakes of a Business Ecosystem

Ecosystems take various forms for instance based on accessibility; it could be an open ecosystem like Uber. Entry is open as the Uber drivers have easier accessibility to the Uber ecosystem. It could also be managed accessibility like Apple App store where there’s certain criteria to be a part of the Apple App Store and so the accessibility criteria are more stringent.

The stakes of the participants in the ecosystem will be higher depending on the attractiveness of the orchestrator of the ecosystem. For instance; App Store developers have a greater stake due to Apple’s major brand equity and market power.

Ecosystems Need To be Protected

European and global mobility market is extremely lucrative there are several competitors in the business and each own major share of the market. Hive electric scooters competes in the hyper-competitive shared electric-scooter market. Last mile mobility has turned out to be a critical need specially in the major cities of the world.

Uber is the market leader in the shared-mobility market across the world. However, it looks at the short distance mobility market as a threat to its business. Uber does not want any of its customers to leave its ecosystem it has taken a stake in Lime which is the competitor of Hive. So, in effect, Uber has safeguarded its ecosystem. On the other hand, Hive has to compete with a much bigger player like Uber, which has taken a stake in its direct competitor Lime.

8 – Crafting your Strategy on a Page

“There are not more than five musical notes, yet the combinations of these five give rise to more melodies than can ever be heard” – Sun Tzu, The Art of War

Strategy on A Page is a tool that helps you conceptualize the strategic aspects of your business story. It should demonstrate how a convincing story or narrative emerges to your customers from the strategic choices you made. Your one-page strategy should also prove the economic logic supporting your business. So to summarize, your page should answer:

Who are your customers and what are you offering them?
Why should they care about this offering and not any other alternative?
How is your business build and your activities synchronized to be the best at this offering?
Are you in a position to make a profit while still creating value for your customer?

The Strategic Planning Process

The strategic planning process for coming up with your one-page strategy is an iterative process.

Start by reviewing the purpose you designed in Section 2. Always keep this in the back of your head while you are on the strategic thinking journey
Identify your target customers and design or update your unique value proposition (more on that in this section). Make sure it is in line with your mission
Analyze your strategic position (are you at an advantage or disadvantage) and update your value proposition to improve it. You should focus your analysis on determining where you stand in terms of
1. Market Structure Driven Advantage (section 4)
1. Resources Driven Advantage (section 5)
Brainstorm for innovative opportunities using the tools you learned in section 6 and modify your value proposition if needed
Brainstorm for cooperation and integration opportunities with regards to your business ecosystem as per section 7. Tweak your value proposition to take advantage of opportunities that you uncovered
Create a list of activities that you need to do to
1. Deliver on your value proposition
1. Protect your strategic position
Determine if the economics make sense (more on that in this section)

What is a Unique Value Proposition

One of the parts of a business model is the value proposition. A value proposition is the statement you tell your customer on how you are going to solve her or his problem differently from someone else in the market.

Satisfying or meeting an unmet demand?

So, we can have a business model if we create something to satisfy an unmet demand. In this case we do a product innovation like the Travelers’ cheques. For example: Amex President, J C Fargo was once vacationing in Europe and unable to convert his letters of credit into cash. This led him to imagine an idea to innovate travelers’ cheques (TC) which could be used to pay whenever and wherever the need arose. People who were willing to pay for the traveler’s cheques as it offered convenience and safety. So, the story for the customer was to exchange their money for peace of mind as the TC had insurance against loss or theft.

Finding a new way of selling something?

We can have a business model if we find a new way of selling something or reaching out to the customer. We have known about auctions since a long time, but online auctions were a new way of reaching the customer. For instance: eBay’s Meg Whitman was able to see a coherent and compelling narrative that could be turned into a profitable business. She understood the psychology and the economics of why the collectors, small business owners and other enthusiasts were attracted to eBay. The customers of eBay had an emotional connect with the brand. eBay was a meeting point for the buyers and sellers and many activities that could be done there couldn’t be conducted outside.

Finding a new way of executing a process?

We can create a business model by finding a new way of selling something. For example: While the whole industry was selling home computers through retailers, Michael Dell decided to go directly to the customer. So, he made a process innovation by reaching out directly to the customers who were not individuals but companies. Dell computers unique business model served them as a strategy as well. He could receive feedback from his customers which were companies. Dell computers was able to fetch high margins in an industry which was otherwise a low margin industry. Dell was also able to customize its computers for its company customers

Choosing activities based on value proposition

Competitors may imitate a few activities but will not be able to compete with you if all your activities are connected, coherent, and synergetic. If you used the VRIO analysis we explained here to position your business at an advantage, it will be almost impossible to copy you.

Once a company is able strongly hold on to its strategic position creates a strategic fit between the chain of activities chosen by the company. So, now the competitors do not compete with a single or a few activities performed well by the firm, but an entire system of activities linked through strong links. It becomes difficult to compete against and so the strategic fit helps keep imitators out.

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which ones could be improved to provide competitive advantage. The value chain analysis was invented by Michael Porter and since then evolved and updated over the years to fit current market standards.

What is a value chain?

A value chain refers to all organizational activities that occur for the delivery of a product or service to the marketplace. These activities range from design and marketing to production and distribution. Value chain management is the process by which a business organizes all these activities in a manner so that a high quality product is offered to the customer.

According to Porter, in order to understand competitive advantage you need to look into all the discrete activities that a business performs including design, production, marketing and so on. For this reason, Porter has distinguished these activities into two categories: primary and support.

Primary activities

These are the actions that are directly related to the conversion of input into output and distribution

Inbound logistics include activities concerned with raw materials to be used for producing the end product
Operations include any activities that transform raw materials into the final product like assembling and packaging.
Outbound logistics are the operations that aid in the collection, storage and delivery of a product to the end client.
Marketing and sales are all activities that aid in product awareness such as advertising, promotions and PR events.
Service includes all activities that improve or maintain the value of the product such as sales training, after-sales service and guarantees.

Support activities

These are actions that assist primary activities.

Infrastructure refers to the firm’s structure including planning, accounting, quality control, legal, finance and other departments.
Human resource management refers to all activities that are concerned with the selection, transfer, promotion and dismissal of the workforce.
Procurement includes activities that ensure that all necessary inputs, such as raw materials and machinery, are being supplied.
Technology development refers to the activities related to technology such as in research and development in order to develop new products

Value Chain Analysis is a useful way of thinking through the ways in which you deliver value to your customers, and reviewing all of the things you can do to maximize that value. Yet, one of the limitations of the model is that itis heavily oriented to a manufacturing business and the language can be off-putting for other types of business. Also, it is advised that Porter’s value chain analysis is used in conjunction with other models in order to form a more objective and comprehensive picture of where your competitive advantage lies.

Do the numbers make sense?

The numbers test means that the business must make economic sense. We do business for profits and there must be a clear way of generating profits. For example; American Express received money in advance for the travelers cheques from customers. The TC’s were used at a much later date, which allowed American Express lucrative float money like a bank.

We may find a new way of reaching customers, but our business has to make profits as well. For example: Price Line tried to connect buyers and sellers for groceries and other retail products. It wanted to become the eBay of the retail industry. It offered discounts but, unfortunately, it could not make the big brand retailers offer those discounts and Priceline ended up using its own money to give discount to customers. Priceline soon ran out of money and filed for bankruptcy.

We may also have an innovative way of selling something for a price, but can we do that for a profit for a sustained period of time? Have we made some assumptions that won’t stand up to scrutiny? For instance: Price line tried to use the business model and apply it to retailing. It tried to use the eBay business model for discount retailing. Price line made some serious errors in assumptions in its business model. It assumed that the big brand retailers would play the game it wants them to play. Price line assumed that the big branded retailers would be willing to give huge discounts in exchange for a volume of sales. However big branded retailers who had spent years in building the brand were unwilling spend lots of money and did not want to play the game as predicted by Price Line.

9 – Surveying and categorizing the firm’s strengths and weaknesses

“Hence in the wise leader’s plans, considerations of advantage and of disadvantage will be blended together” – Sun Tzu, The Art of War

SWOT analysis is a very simple but powerful technique used to evaluate the your strategy’s strengths and weaknesses. Its also important in identifying what opportunities and arise because of it. Conducting a SWOT analysis not only pinpoints what your strategy is good and bad at, but also helps develop and implement an appropriate action plan to address problems and take advantage opportunities. This tool can be used in conjunction with other strategic tools such as PESTLE analysis for a more thorough situational assessment of the business landscape.

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats and each one is more extensively analyzed below:

Strengths

Strengths describe what the organization is good at and are considered internal attributes that the company has control over. A firm’s strengths are the attributes that differentiate it from the competition and can range from intangible attributes such as a strong brand image to tangible asses like proprietary technology or a specific product. Identifying the organization’s strengths is the first step to the SWOT analysis and provides the basis for the rest to follow.

Weaknesses

On the other hand, weaknesses are the skills and qualities that your company lacks or things that your competition does better than you. These are again internal to your company and can always be changed, adapted or improved. Weaknesses may be range from tangible assets that the company is in need to communication gaps between the teams. Becoming self-aware of what is holding your company back is the first step to change.

Opportunities

Opportunities are external, positive factors in the business environment that could provide the organization with a competitive advantage. These could cover everything that could enhance the growth rate of the company, increase the customer base, increase sales and profits or even boos your employee morale. A company should always pay close attention to upcoming events, changes in regulations or new trends that could benefit the firm in one way or another.

Threats

On the opposite side of the coin, threats are external, negative factors that the organization has no control over. Everything that poses a risk to the organization or hinders its rate of growth is considered a threat. This could be new entrants in the marketplace, changes in the regulatory environment and financial risks. One way to avoid undesirable situations that could harmful to your organization is to put contingency plans in place in order to evade these situations before they occur.

10 – Strategic Plan Road Test

“Now the general who wins a battle makes many calculations in his temple ere the battle is fought” – Sun Tzu, The Art of War

John Mullins is an entrepreneur and a professor at London Business School and in his published book “The New Business Road Test” he talks about the Seven Domains Model. The model was specially created for entrepreneurs wanting to start their own business for scratch as well as for established companies that want to expand their operations by introducing new products or services.

Mullin’s Seven Domains Model divides the proposed venture into seven domains. Four of them examine different aspects of your market and industry at a micro or macro level, while the other three look into your team. Each of the domains is further discussed below:

Market Attractiveness: This domain looks at the size, growth, and potential of the entering market in order to assess its attractiveness on a macro level. Some examples may be the number and type of customers, sales value and current market trends. The PESTLE analysis can act as when assessing the attractiveness of the market.
Industry Attractiveness: Similarly, this domain examines the attractiveness of the industry on a macro level. Here, it is suggested that you use Porter’s 5 Forces Model in order to evaluate the factors that are impacting the profitability. These are the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, the threat of new entrants and the competitive rivalry.
Sector Market Benefits and Attractiveness: This domain takes a micro-level approach and considers the segments that are likely to benefit from the new venture or product. You need to examine the current trends going on within the segment and evaluate any growth opportunities identified. What products are being offered and how your new offering will be perceived against competitors?
Sustainable Advantage: Likewise, this domain looks into the micro-level in order to identify a way to build a Unique Selling Proposition based on your resources and core competencies. Think what resources and capabilities you have, and what the competition lacks, and thereafter assess whether these are going to give you a head start.
Connectedness Up, Down, Across Value Chain: Moving on to the team domains, this one examines the relationships along the value chain among all people involved, ranging from suppliers and investors to customer and competition. Having a clear idea of how your stakeholders are inter-connected can act as a useful preventative measure for future conflicts.
Ability to Execute on Critical Success Factors: Critical Success Factors can be defined as the necessary criteria to be met in order for a business to achieve its mission and objectives. Within this domain, you need to really think whether your team can deliver upon these CSFs. Take a look at the skills, knowledge, and experience of yourself and your team and subsequently identify the points you are strong and weak.
Mission, Aspirations, Propensity for risk: Finally, this domain analyses the commitment and aspiration of the team and leadership. How passionate are you about starting up your own business? What is your mission and vision? What do you want to achieve? These are all sorts of questions you need to ask yourself and your team.