What is a business
strategy? It is the result of choices made to maximize long-term value.
The question “What is strategy?” has spurred numerous doctoral
dissertations, countless hours of research, and hearty disagreement among
serious management thinkers. Perhaps this is why many executives also struggle
with it. Nonetheless, decision makers seeking to steer a business to sustained
success need a succinct and pragmatic response. After all, it can only help
executives to have a shared definition of strategy when they are creating,
communicating, and implementing a strategy for their business.
So, what is a business strategy? Strategy is different from vision,
mission, goals, priorities, and plans. It is the result of choices executives
make, on where to play and how to win, to maximize long-term value.
“Where to play” specifies the target market in terms of the customers
and the needs to be served. The best way to define a target market is highly
situational. It can be defined in any number of ways, such as by where the
target customers are (for example, in certain parts of the world or in
particular parts of town), how they buy (perhaps through specific channels),
who they are (their particular demographics and other innate characteristics),
when they buy (for example, on particular occasions), what they buy (for
instance, are they price buyers or service hounds?), or for whom they buy
(themselves, friends, family, their company, or their customers).
Having a differentiated approach to a target market can be a source of
great advantage in its own right. Southwest Airlines is a case in point. Early
in its development, Southwest defined its target market to include regular bus
travelers — people who wanted to get from point A to point B in the
lowest-cost, most convenient way. In contrast to the industry’s hub-and-spoke
standard, Southwest’s point-to-point operations and hassle-free service model
comprised a compelling value proposition for people who would otherwise choose
bus travel. This gave the company a unique growth path compared to the
traditional airlines.
Or consider Sir Brian Pitman, the former CEO of Lloyds TSB: He had a
policy of defining the company’s target markets at one level of segmentation
lower than the competition did. For example, Lloyds was the first “High Street
Retail” bank in the U.K. to carve out “high net worth” as a separate business
with its own unique target customer, value proposition, and system of essential
capabilities. Similarly, it was the first British commercial bank to drop large
companies as a target customer (with a few “flagship” client companies as
exceptions). Sir Brian’s insight that you could win by being sharper than the
competition in choosing your target market turned Lloyds from the U.K.’s banking
laggard to its leading bank.
In both the Southwest and Lloyds cases, “where to play” was an
essential part of what made the company’s strategy so successful for such a
long time.
“How to win” spells out the value proposition that will distinguish a
business in the eyes of its target customers, along with the capabilities that
will give it an essential advantage in delivering that value proposition.
Choices must be made because there is at least one way to win in every market,
but not everyone can win in any given market. With good choices, a business
gains the right to win in its target markets. The target market, value
proposition, and capabilities must hang together in a coherent way. And good
strategies call for the right amount of “capabilities stretch”: not too much or
too little change from the capabilities a business already has.
Every company faces innumerable options for where to play and how to
win. Often they have to sort out seemingly conflicting objectives, such as the
need for both long-term growth and short-term profitability, to choose which
options to pursue. To “maximize long-term value” means — when there are
mutually exclusive options — to select those that will give the greatest
sustained increase to the company’s economic value. We once heard a corporate
leader ask, “But how can you ever know when you have maximized value?” The fact
is, you can’t, because you can never know with certainty if there’s a better option
than those you’ve considered so far. To “maximize long-term value” is to never
stop looking for those higher-value options.
It’s worth emphasizing that “maximizing long-term value” is not the
same thing as “maximizing share price” or “maximizing shareholder value.” Those
objectives typically represent the most short-term demands of current
shareholders or their advisors, and they do not always align with what is best
for all shareholders, particularly long-term owners. On the other hand,
“maximizing long-term value” does not mean forgetting about the short term.
Economic value takes into account growth and profitability, short-term and
long-term value, and risk as well as reward.
In the end, to define the fundamentals of your business strategy, you
need only to answer three questions:
1. Who is the target
customer?
2. What is the value
proposition to that customer?
3. What are the essential
capabilities needed to deliver that value proposition?
Without clear and coherent answers to these three questions, you may
have an exciting vision, a compelling mission, clear goals, and an ambitious
strategic plan with many actions under way, but you won’t have a strategy.
Ken Favaro, with Kasturi Rangan and Evan Hirsh
strategy-business.com
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