- IMD Business School

What is a business strategy? And how to develop one!

A business strategy in its simplest form is a tool for helping you achieve your business goals

A business strategy provides the guiding principles for many organizational decisions, such as hiring new employees, or developing new products. And helps you to define the methods and tactics you need to take within your company.

Creating a business strategy that’s in line with the vision you have for your organization is a time consuming exercise. In this article, we’ll discuss what a business strategy is and why it’s important, the different components of a business strategy and explore some examples of business strategies to help you generate ideas for your own company.

Whilst a business strategy is simple to understand in theory, developing a good business strategy, and then actually implementing it, is no easy task.

Discover the key elements of a business strategy :

What is a business strategy?

In essence, a business strategy is an organizational master plan. This plan is what the management of a company develops and implements to achieve their strategic goals. Essentially, a business plan is a long-term sketch of the desired strategic destination for a company.

This long-term sketch will contain an outline of the strategic, as well as tactical decisions a company must take to reach its overall objectives. This business strategy will then act as a central framework for management.

Once this framework is defined, management must live and breathe it. It helps the different departments within a business work together, ensuring that all departmental decisions support the overall direction of the organization. This helps to avoid working in silos, or different teams pulling in opposite directions.

At this point it is important to highlight the difference between a business strategy, and a mission statement. One example is Amazon’s “to be Earth’s most customer-centric company” this is not a strategy, more the vision that the strategy will deliver, and creates the framework within which the strategy will be developed.

“However beautiful the strategy, you should occasionally look at the results.” – Winston Churchill

How is strategy different from tactics?

Before we get into the details of how to build a business strategy, it is important to understand how strategy differs from tactics. Both of these contribute to each other, yet are entirely different things.

Strategy as we’ve identified refers to the long-term goal or roadmap for an organization, and how it plans to reach them. Or, the path the organization will take towards its goals.

Conversely, tactics refer to the specific set of actions taken to reach the organizational goals, or strategy.

For example, a company may have a strategic vision to become the cheapest supplier of a product in the market. This requires their managers to negotiate with suppliers, reducing purchase costs. This, is a tactical move taken towards achieving the set strategy.

“Good tactics can save even the worst strategy. Bad tactics will destroy even the best strategy.” – General George S. Patton Jr.

What are the key components of a business strategy?

Business strategies come in all shapes and sizes (see some examples/resources below) and can vary significantly in their depth. Most business strategy documents will however contain the following:

1. Vision and objectives

A business strategy is intended to help you reach your business objectives. The vision element of this provides a clear direction for the business. This enables you to develop tactical instructions within the business strategy for what tasks need to be completed, and which of your resources are responsible for completing them.

2. Core values

A business strategy guides leaders, as well as departments, about what should and should not be done, according to the organization’s core values. Defining the organizations core values helps to ensure that employees are on same page, and with the same goals.

3. SWOT (strengths, weaknesses, opportunities and threats)

For any business, understanding its strengths, weaknesses, opportunities and threats is critical. This is a core part of any business strategy, and ensures that humility, and self-awareness are present. Understanding this helps to define where the organization can win, and areas that must be addressed in the future.

4. Tactics and operational delivery

The tactical element of a business strategy will set out the operational details that define how the work should be delivered. Tactical delivery is critical for the success of any business strategy, and managers who have responsibility for tactics understand what needs to be done. This ensures that time, and effort is not wasted.

5. Resources and resource allocation

Generally the resource element of a business plan will cover the allocation of existing resources, as well as where additional resources will be found. Most businesses rely on many different resources, people, technology, financial, and physical resources. Having a clear picture of these, and future requirements enables leaders to see where to add more resources in order to achieve their goals.

6. Measurement and analysis

The evaluation phase places emphasis on how a business is performing in relation to the business strategy. Measurement, helps you to stay closely aligned to the strategy, define deadlines and goals and address things such as budget concerns. Nowadays, data and business intelligence platforms play a crucial role in this phase.

Why is a business strategy important?

So, now we’ve defined exactly what a business strategy is, we can now ask the question why is it important to have one?

Virtually every business leader has some form of vision for their organization. Generally, in the early days, such as a start-up environment, this can be very fluid. However, as time goes by and business grow, or get busier the “business strategy” may become less defined.

When a strategy is not well defined, a business may start to struggle, with personnel change the core of a business and its values can often become less defined. This can, in some cases lead organizations to become victims of their own success, they may be achieving short-term results, but this could be at the expense of their long-term viability.

This problem can become compounded with influencing factors such as sales dips, rising costs or increased competition. In these cases a business will begin to suffer. And, as employees work tirelessly to “put out fires” caused by such changes, time for strategic thinking becomes a precious commodity.

This can of course be avoided. Creating a business strategy is not an overly difficult task, but it does take time and focus. As a leader you should prioritize your business strategy and ensure that you dedicate some time away from the day-to-day to define your business roadmap.

Creating a business strategy does not automatically mean your business will be successful. It does however enable you to share your organizational vision and goals with your employees. And, if done correctly creates a common thread across a business to strive for success. And, if the going gets tough, be assured that your employees are aware of the strategic vision of the organization, and can double-down on your vision, rather than simply fighting fires.

How to build a business strategy

The above gives us a practical definition of strategy and why it is important. Now, we need to look at how to successfully build one. This can be broken down into a few key steps:

1. Defining your vision

For any strategy to be successful, the fist item to consider is the company’s values and desired market position. Or, in other words a company’s vision.

As we referred to earlier with Amazon’s vision statement:

“To be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”

This sets the foundation for developing the rest of the business strategy. A vision is not just the mission statement, and will also define the value proposition, ideal customer profile and core market.

2. Setting your objectives

The second step of building a successful business strategy is to set out top-level objectives.

These, in most cases, will focus on items such as revenue, market penetration, growth or shareholder value creation. But these are unique to each and every business. When developing your strategy it is imperative that you are realistic when objective setting.

A business strategy is ultimately aiming to answer a series of questions of how a business can compete, grow and prosper.

High-level objectives should not focus on achieving a company’s mission, or reflecting it’s core values. Instead, these items tend to be considered at a lower, more tactical level such as marketing or communications strategy.

3. Analyzing your business and your marketplace

Ok, so you have now defined your vision and objectives. Next on your strategy development list is to analyze your business, here’s where your SWOT analysis is key.

As a leader, knowing where your business is strong is a critical skill and helps you develop your business strategy.

Similarly, it is important that you are aware of your weaknesses. Understanding this ensures that your strategy is not overly geared towards areas where you have identified weaknesses, ensuring greater chance of success.

The SWOT analysis considers not only the internal situation of a company, but also the external situation. In other words, marketplace. Here’s where you define your playground.

4. Defining your competitive advantage

The fourth key stage of developing a business strategy answers the question of how the objectives will be achieved. In other words, how you will compete in your defined market.

This can also be defining the Unique Selling Point (USP) that sets you aside from your competition. This is particularly important in competitive industries where there are many defined competitors.

At this stage you will explore items such as how you create demand for your products or services, increase sales, utilize new technologies and generate higher margins.

For many businesses this is a make or break step. Failure to define and articulate a competitive advantage can be fatal for businesses.

5. Building a framework

The final piece of the strategy puzzle is the formulation of a framework. Or, it can be considered translating the strategy into more department specifics.

For example, individually a communications department may contribute very little towards an overall strategic direction. As there are elements within the strategy that are “out of scope” for this department.

Hence, the framework considers the vision and needs of each department within an organization and subsequently aligns these with the organizational goals.

How to measure the success of a business strategy

We may consider a business strategy to be successful when it is directly responsible for organizational growth and sales.

However, to really understand whether a strategy is successful we must develop a more granular measurement. It is here that you need to define Key Performance Indicators (KPIs).

KPIs are typically defined by department, with each of these contributing to the overall performance of the business. Some examples are:

Financial performance

  • Revenue
  • Gross profit
  • Net profit
  • Operating profit
  • EBITDA (earnings before interest, taxes, depreciation, and amortization)
  • Free cash flow

Competitive advantage

  • Market share %
  • Brand recognition
  • Media coverage
  • Growth vs competition
Discover more Strategy content