What is a Business Strategy?
Business strategy is a compendium of deliberate choices that an organization makes to maximize its value over a given period of time.
Maximizing the value of an organization implies that as a business executive you must manage your strategies to extract the most you can from the strategic resources at your disposal.
Those strategic resources include money, people, knowledge, assets, relationships, intellectual property or any other factor that can be levered to increase an organization’s value.
Those efforts, however, have to be strategic, meaning that they must be well-thought and deliberate.
In an interview with Joan Magretta, strategy guru Michael Porter argued that while most executives think they have a business strategy, they really don’t.
We, however, think differently. In our view, a business always ends up having a strategy even if they don’t intentionally plan for it.
The thing is, that a good, deliberate strategy is more likely to get the results you want than an “emerging” one.
In the end, if you don’t know where you want to go, you will most likely end up somewhere else, and it is not different when it comes to a business and its strategy.
This article provides you with an updated take on what a business strategy means for you as a business executive in today’s hyper-competitive markets and how to create one for your organization based on our extensive research of the subject, with examples, charts, videos, and downloadable tools.
Here’s what we will cover:
- Explaining ‘Business Strategy’
- Corporate Strategy versus ‘Business-level Strategy’
- Ten Immutable Laws of Modern Business Strategy
- Types of Business Strategy
- Strategic Positioning
- Differentiation Strategy
- Price Leadership Strategy
- Business Growth Strategies
- Innovation as Part of your Business Strategy
- Business Strategy Template: A map to strategic choices
- Business Strategy Examples
- Best Strategy Books
The content of this article is based on Sun Wu’s best-selling book Strategy for Executives™ which you can now download for free here. Now let’s dive in.
Explaining Business Strategy
Classic strategy thinkers in the 1980s and 1990s defined the goal of strategy as “to outperform competitors within a given market”, which derives from the idea that companies compete with others at the “share” level, and that to win they must outperform rivals on the basis of their “Return on Investment” (ROI) for shareholders.
While the idea captures the essence of a competitive strategy and the strategic thinking taught during the last 40 years, it doesn’t reflect the nature of today’s markets, and what a modern organization needs to thrive and last in today’s hypercompetitive dynamics.
First, by defining your strategic goals in terms of your competitors’ strategy and performance, you are most likely leaving money on the table.
In fact, focusing your attention on your competitors’ behavior may prevent you from realizing other potential sources of value for your company producing a shortsighted strategy.
You wouldn’t believe for example that Amazon’s CEO Jeff Bezos wakes up every day thinking that he doesn’t need a strategy for his businesses just because his company already outperforms Walmart and Barnes & Noble in eCommerce and books respectively.
Here’s what Bezos himself thinks about setting your strategic goals based on competitors’ behavior: “Let’s say you’re the leader in a particular arena, if you’re competitor-focused and you’re already the leader, then where does your energy come from?”
Defining strategy in terms of other companies’ strategies is just not ambitious, nor specific enough.
What if all of your competitors suck or are having a rough year? Would you be happy just because your strategy helped you outperform a poor-performing business?
Jeff Bezos and Amazon already left all competitors in the dust a while back and his company already hit a trillion-dollar market valuation, yet he keeps growing it and improving its strategy as fast as he can.
Because that’s the goal of his strategy: “to maximize Amazon’s value within the foreseeable future“, and not something based on his competitors’ strategy like “outperform our competitors“.
Your job as a business executive is to maximize what you can do with the strategic resources you have at hand, and to do that, you need to consider all the alternatives available and select the ones that you believe will increase the organization’s value the most for the least amount of effort.
Second, the classic strategy definition by default limits the scope of operation of your company to the confines of a “market”, once again producing a shortsighted strategy for your business.
If your goal is to be the best company in your market, then by definition you would only try to make money within the boundaries of that market, advice that doesn’t reflect the reality of today’s market dynamic where companies are more often deploying strategies to cross the boundaries of their original industry looking for greener pastures.
If companies were to stay within their markets, Google wouldn’t compete outside internet search, nor would Amazon compete other than in eCommerce.
They would just focused their strategies to the things that they are best at.
Business strategy questions that you should be asking
Instead of benchmarking your strategic performance against competitors, the questions that you should be asking yourself are:
Are we doing everything we can to maximize our company’s wealth over the foreseeable future?
Are we doing the “right” things?
Are our businesses in the right market position?
Are we pursuing the right “strategic” growth opportunities?
Are there other ways to grow?
As long as you are shooting to get the best return from your resources, the question of whether you end up over- or under-performing against competitors, or if your profits come from markets that are close or away from your core, becomes irrelevant to your strategy.
See Understanding Business Strategy for a more comprehensive view of this subject.
Corporate Strategy vs Business-level Strategy
In a company that owns a single business unit the goal of its strategy is fairly straightforward: to maximize the business’s valuation over the foreseeable future.
But when we try to apply that definition to a company that owns multiple business units, the boundaries of its strategy may no longer be clear.
While the difference between a “corporate strategy” and a “business-level strategy” may seem evident and to some extent trivial, keeping a clear distinction between the two is necessary for a good understanding of your strategy. Let’s explain.
To start, most of the concepts typically associated with strategy such as competition, market forces, and disruption usually refer to the strategy of a particular product or business unit.
But when we talk about a “corporate strategy”, we are referring to a set of guidelines that govern the behavior of a company that owns more than a single business unit.
While each unit must have its own strategy set at the business level, to take into account the particularities of its market and incumbents, a Corporate Strategy must still be set at the “mothership” level to guide the general behavior of the corporation as a whole and of each of its business units.
Take Florida-based NextEra Energy (NYSE: NEE), an American power company that serves markets in the US and Canada.
The company has several subsidiaries, among them: NextEra Energy Resources (NEER), a power generation business; Florida Power and Light (FPL), a power utility company; NextEra Energy Partners (NYSE: NEP), a publicly traded company that owns and operates wind and solar projects in the US; NextEra Energy Transmission (NEET), a company that builds and operates power transmission assets in the US; and NextEra Energy Services (NEES), an electricity retailer serving residential and commercial customers across the US. All are under control of NextEra Energy Capital Holdings (NECH) with the exception of FPL.
Each of these subsidiaries is treated by NextEra Energy as an individual business unit, and because they operate in different markets each must set its own business strategy, under the guidance of the general corporate strategy set at the top.
Why having a corporate strategy is so important?
In a multi-business corporation such as NextEra, its executives will seek to maximize its value as a whole, even if that means sacrificing some of its business units to favor others that are more promising or strategic.
For example, at a given point in time, their strategy may suggests that it is better to reinvest profits from a strong business, that happens to be in a dying industry, onto a weak unit that’s getting traction in a fast-growing market, rather than trying to protect the market position of the dying business.
Because the goal of its business strategy is the maximization of the organization’s value as a whole, its executives must sometimes pursue this type of cross-business optimization, even if that means achieving suboptimal results in a particular business unit.
Think about corporate strategy as a general set of rules that seeks to maximize profitability at the corporate level by running individual “business units” which operate within particular markets.
Because each market is different, each unit needs its own “business strategy”.
From that idea we can also see how a “business” strategy must be designed to co-exist with the “corporate” strategy set at the top.
Other examples may be more familiar to the you. Amazon.com, for example, runs its massive eCommerce platform as a standalone business, while owning other individual strategic businesses like Amazon Web Services (AWS), a cloud computing business; Zappos, an online shoe and clothing retailer; and Whole Foods Market, a brick-and-mortar supermarket chain that specializes in healthy food.
Each of these three divisions operates in different markets and faces different threats, so their strategy has to be set at their business level, but under Amazon.com’s corporate strategy guidance.
From these definitions, it is clear then that what gets disrupted or become obsolete are “products”, not companies.
But because many strategies rely only on a particular product, when that product gets disrupted the “business” goes with it.
From this, we can conclude that to really extract the most from your company’s resources, you must adopt some kind of portfolio approach to how you manage the strategy of your business units and allocate resources strategically, a subject that we cover extensively in our book.
Ten Immutable Principles of Modern ‘Business Strategy’
The fundamental concepts of business strategy haven’t changed much over the last few decades. What has been taught in business schools since the early 1980s are still the pillars that support most of today’s strategy frameworks.
But rather than having changed, our knowledge of strategy has “evolved” significantly now that we’ve had the opportunity to experience longer periods of competition and to observe the rise and fall, sometimes miserably, of companies and businesses once regarded as the most innovative like Sears, Circuit City, Toys R Us, Radio Shack, Blockbuster, Pets.com and Borders Books.
One of the most important contributions of our research, is that through it we have been able to rewrite classic principles of business strategy, providing a long-deserved update.
We start with the premise that to be successful, there are only two things that a CEO must do well: protect earnings from operating business and maximize earnings’ growth over the foreseeable future.
That combination of defend-and-grow is what builds up an organization’s value over time.
If during a given period a CEO does nothing else but to protect the company’s earnings from erosion and grow those earnings at the level or even higher than other high-performing companies (not only industry competitors), most people (especially shareholders) would agree that the CEO has done a great job and that the business’s strategy has been successful.
Second, let us remind you that the profit formula only has three components: Price, Demand and Costs, and that consequently, a good strategy is one that either helps us sustain premium prices or superior levels of demand, or one that help us lower unit costs.
A business decision that doesn’t help you achieve either of those two goals should not be considered being part of your business’s strategy.
Ten basic rules of a winning business strategy
Based on these premises, we combined more than 40 years of research, including our own, to come up with ten fundamental rules that must support the strategy of any of your businesses:
- The aim of any business, hence the goal of its strategy, is to find a market position that is both profitable and defendable in its markets of choice.
- A market position that is both profitable and defendable can only be achieved through differentiated products or lower relative costs, that is, by either doing different things from competitors or doing the same things in different ways.
- A differentiation strategy should translate into higher prices, higher demand or both. Lower costs on the other hand, should translate into lower prices, higher margins or both.
- To defend its market position, a business must deliver its Value Proposition at a lower cost than anyone else.
- What erodes a business’s ability to remain profitable is commoditization, not competition. Commoditization can happen to a product’s particular set of benefits and features, or to the ways in which those benefits and features are created.
- Because the process that leads to commoditization is systematic in nature, a profitable market position is only defendable on a temporary basis, making strategy a process that must continually readjust itself.
- Although profits eventually lead to cash, the value of a business, and therefore the success of a strategy, must ultimately be measured through cash, not profit.
- A business should persistently look for ways to reduce costs even if its strategy is not based on low prices. Conversely, it should always look for ways to increase revenues, even if its strategy is not based on differentiation.
- The design of an organization must fit its strategy, not the other way around. This necessarily means that a change in strategy must drive a change in the design of the organization.
- A strategy can only deliver its benefits if it is well implemented. Therefore, an integral part of the strategy must be a “system” to ensure its systematic execution.
Take these as the ten immutable commandments of a business strategy, and those who violate any of them will see how their business loses profitability over time.
On the growth front, business expansions and innovations are the only two strategies to grow organically, and as you will see later we identify seven different strategic paths you can use to pursue growth in your organization.
From these principles, we can conclude that to be a success your company’s strategy must cover three areas. It must have:
- A strategy to protect your operating businesses
- A strategy to maximize business growth over time, and
- A strategy to ensure that 1 and 2 happen.
Those are the principles upon which our business strategy framework is developed throughout the rest of this article. But first, let’s review the different types of strategies that we deduce from these principles.
Types of Business Strategies
Based on the three plans (i.e. strategies) we described above, we can deduce a few “types” of business strategies that you must have in place in order to achieve your organization’s long-term goals.
For example, to protect your operating businesses, you only have two competing choices to pick from: a differentiation strategy or a low price strategy.
That means that the only way your businesses can achieve a market position that is both profitable and defendable is by offering products and services that are different from competitors’, or that are offered at a lower price. We explain both strategies further shortly.
When it comes to your growth plan, on the other hand, there are only two types of strategies you can pursue: expansions or innovation.
Business expansion refers to finding ways to do more of what your company is already doing, while innovation covers the identification of “new” sources of earnings which.
Let’s tackle each strategy briefly.
Protecting your core business with a competitive strategy
Protecting a core business means that you must find a sustainable market position for your business where you can create (and protect) superior profitability, but from the strategy principles we reviewed earlier, we know the only way to defend a profitable position is through differentiation, lower prices or a combination of both.
Differentiation means offering products and services that are in some way unique AND valuable to target consumers when compared to similar solutions.
Differentiation is very important for strategy because it helps influence two variables of the profit formula: price and demand.
Products that are perceived as valuable and unique can command higher prices or drive higher levels of demand than other comparable solutions.
Another way to increase a business’s level of demand is through lower prices. If you price products below comparable solutions, buyers will be more motivated to pay for them.
A low-price strategy, or “price leadership” as many refer to it, requires a stricter cost discipline and a different approach to customer value than a differentiation strategy.
Crafting a growth strategy for your business
A growth strategy seeks to find ways to increase a company’s earnings over the foreseeable future, and as we saw before there are two ways to do it: through business expansion or through innovation.
There are many ways to pursue growth in your strategy as we will see later, but they all fall under these two major types, and as a business executive it is your responsibility to pick the initiatives you believe will have the most impact on your company’s performance.
We cover these four types of strategy (Differentiation, Low Price, Expansions, and Innovation) in more detail later in this article.
Strategic Positioning: What a good business strategy always begins with
The first line of business for any established company, hence the priority of the business’s strategy, is to protect profits from its core businesses.
Before thinking about launching new products, growth or the latest management trend, what you must have is a solid strategy to protect the profits from your operating businesses and you must fight, bite and scratch if necessary to protect that core source of value.
Protecting core businesses means finding a sustainable position in the market for each of them where they can create and defend superior profitability.
We explained earlier that to establish a market position that is both profitable and defendable a business’s strategy must continually challenge the commoditization of its products and services.
That means that it must either perform different activities from its rivals or perform the same activities in different ways.
Strategic Positioning is the concept that best tackles this challenge as it entails making choices about both the kind of value that your products and services will offer and how that value will be created.
These choices are reflected through two main concepts:
- The customer’s Value Propositions: The decisions a business makes about the benefits and features its products will offer, the customers they will target with those products, and the price at which those products will be offered to those target customers.
- The business’s Value Chain: The decisions a business makes about how it organizes and manages all the activities involved in delivering a Value Proposition.
Why good value propositions must be at the core of your business’s strategy
As professor and strategy guru Michael Porter likes to say: “A Value Proposition that can be effectively delivered without a tailored Value Chain will not produce a sustainable competitive edge.”
Unless your company offers products and services that are both unique AND valuable to target consumers, or are to some extent difficult to copy, your position in the market could be vulnerable to the attack of companies with similar capabilities and well-funded copycats.
A differentiated Value Proposition and a distinctive Value Chain, therefore, are the only means that you have as a business executive to defend a profitable market position.
Both concepts are well tied up in the Strategic Positioning of the business.
The challenge that you will face in trying to strategically position your business is in finding the profitable market positioning that can sustain and protect during the foreseeable future.
Target, the department store chain, knows Walmart’s strategy in the same way that any furniture vendor knows Ikea’s strategy, yet they all have managed to find a position in their respective markets where they are profitable and difficult to challenge or imitate.
The strategic positioning of a business therefore is not a single event but an iterative process that monitors your business’s performance and continually adjusts direction based on measured changes in the market.
For a deeper analysis of this subject, see our Strategic Positioning section.
A differentiation strategy is a business’s effort to create products and services that are perceived by target customers as being different from other solutions that do a similar job.
Differentiation doesn’t really mean offering higher or lower value, but just offering a different kind of value.
Before we move on, notice that what drives positioning and willingness to pay is the perception of value, and not whether or not that value is real, which means that even though companies try to differentiate products in their respective markets, the place where product differentiation really happens is in the minds of your target customers.
That’s where the product really has to win, and where you’ll measure the success of your business’s strategy.
What is a differentiated value proposition and how it can help your strategy?
A differentiated Value Proposition creates a particular perception of value in the minds of your target consumers with respect to other comparable solutions, and that perception is what ultimately determines how much those customers will be willing to pay to get the benefits of your products.
And since higher prices can increase profits, as we saw before, then a differentiated value proposition can be a powerful tool in your business’s strategy.
Customers are usually willing to pay for products that offer a particular kind of value, based on how common that type of value is found in other solutions, but if the same benefits and features are found everywhere, they will be more inclined to make a price-based decision and just select the cheapest option.
Products that are both unique and valuable have a higher chance of commanding premium prices or higher levels of demand, while products that are considered as more basic (or less rich in terms of benefits and features) but priced lower usually have a higher chance of gaining traction with price-sensitive buyers.
There are however some tradeoffs associated with those decisions since more specialized products would usually be appealing to a smaller customer segment, while products with lower price can target larger audiences. Considerations of great importance for your business’s strategy.
Sometimes less is more when it comes to a business’s product strategy
In many cases, the key to success is in narrowing down to a particular set of benefits and features not found in other products which satisfy the particular needs of narrow target customers and pricing those products accordingly to create enough incentive for those customers to pay for them.
A good aid to see how products compete with other alternatives in terms of features, cost and other factors is the “Strategy Canvas”, a tool introduced by W. Chan Kim and Renée Mauborgne in their book Blue Ocean Strategy.
A Strategy Canvas is a visual tool that plots the factors upon which incumbent products compete (therefore the factors they invest in) on the horizontal axis, and the level of value that buyers receive across the competing factors on the vertical axis.
The idea behind comparing solutions against each other is to identify the factors upon which the incumbents’ strategies are competing, and come up with ideas for new products (or improvements to existing ones) that are different from the incumbent solutions.
For example, a company could decide to make a product that only offers the features and benefits that target customers value the most and eliminate all others factors, helping the company reduce costs at the same time.
Using perception maps to help strategically position your business’s offers
For businesses operating in competitive environments, there are also other tools available, like perception maps for example, which help us measure the positioning of a given brand in the minds of target consumers, relative to other solutions that serve the same market.
By measuring this positioning you can make proper changes in your strategy and adjust your business direction.
To see how this works, let’s take a look at the indicative perception map shown below, which presents competing products along two critical dimensions: Market Appeal (Centrality) and Distinctiveness.
On this map Centrality relates to the customer segment of the market to which the product is appealing, going from broad (mainstream) to narrow (niche), while Distinctiveness relates to the degree to which the brand stands out from others and becomes distinguishable (unique) in the minds of target consumers.
Ideally, the more differentiated or unique a product or service is, the better the company is positioned to charge premium prices or create more demand.
However, as we mentioned previously highly distinctive or unique products, especially if high-priced, will usually appeal to a smaller segment of the market that is able to appreciate or effectively use the extra value.
The broader the target segment the fewer opportunities for a differentiation strategy will exist, since the products would need to appeal to a bigger audience.
Consequently, these products may have to be priced lower (a low-price strategy) in order to reach broad markets effectively.
You may use perception maps to help you find a profitable and defendable position based on your organization’s goals and capabilities, see where your products stand in the consumers’ minds at any time, and who your real competitors are (in consumers’ minds).
Needless to say, differentiation is by nature a relative term, meaning that the movement in a perception map depends on the efforts that the other players are making.
Price Leadership Strategy
Despite what many believe, competing as a low-price player doesn’t mean selling a lousy product. It is actually quite the opposite.
Although it might seem counterintuitive for some, a low-price strategy always must start with a good product as part of your business strategy.
Our advice is that “When it comes to costs, be cautious, but never be cheap”.
While the success of low-price positioning hinges on keeping all costs below competitors’, low prices should not be the result of watering down good products, but from focusing on the most basic needs of price-sensitive buyers.
That’s how your strategy as a low-price competitor can be effective.
A low-price provider avoids extra features and frills that are only valuable to higher-end buyers, and instead delivers a basic solution that does a job that is just good enough.
Procter & Gamble’s Ivory soap bar, Ikea’s furniture, and JetBlue in the airline industry are all examples of low-price players.
Their success is not in watering down products but in carrying a basic stripped-down offer, focusing on the features that price-sensitive buyers need, and making those cheaper than everybody else.
A second misconception about price-based competition is that low prices mean lower margins.
That’s absolutely not true and low-cost players like Walmart outperform higher-end retailers with a strategy that makes money through a different business model, in this case higher inventory velocity (selling the same items more times than competitors within a given period).
Successful low-price competitors target customers who are willing to pay less to get a basic offer, and they do so through super-efficient value chains that keep tight control on costs.
A frugal mentality is key for the success of a low-price business strategy
When running a low-cost operation every penny counts, from the cost of manufacturing, packaging, distribution and advertising, to how employees are incentivized and how the company carefully invests in R&D and customer acquisition.
If your business’s strategy is around competing on low prices, frugality must become your way of life and something of a religion, and must be well-rewarded throughout your organization.
So you must help translate this low-cost mentality into highly efficient business models that permeate everything the business does, and it will become your most valuable asset.
The success of your business’s strategy as a low-price competitor depends on continually challenging your cost assumptions, sometimes defining your own metrics of quality and performance, just like Jetblue has done in the budget airline space.
Business Strategies for Growth
When market analysts and sites like Seeking Alpha and Fool.com talk about a growth strategy in business, most of the time they refer to revenues (aka the “top line”) during a given period of time, normally a quarter or a year.
But in our world, when we talk about a growth strategy we exclusively refer to growing Net Earnings (aka the “Bottom Line”) or Free Cash Flow (aka FCF).
At the end of the day, both Net Earnings and Free Cash flow are better metrics of the profitability and true health of an organization. See our summary of Selected Financial Topics if you need a refresh on Financial Statements and they relate to your business strategy.
Not all growth is created equal and many times sales alone don’t tell you the whole story. In other words, growing your top line (revenues) doesn’t necessarily mean that you’re growing your bottom line (profits).
For example, a new project that brings in $10 million a year to a small company’s bottom line might seem like a good opportunity at the outset, but if the company has to commit $500 million to create that opportunity, then “as an investment” that opportunity doesn’t look that good or strategic.
That company would most likely be better off by allocating that money to higher-return projects or initiatives of strategic nature, even if those are outside its core markets. $10 million a year from a $500 million investment is not the same as $10 million a year from a $50 million investment.
Of course, that is a simplification that doesn’t take into account the strategic implications of the investment but it sends a clear message: the cost of a growth effort matters and revenues don’t tell the whole story.
For that reason, you must always pay careful attention to the costs of your growth strategy (both financial and non-financial costs) and to how sustainable you expect these efforts to be in the long run.
Narrowing down your strategic growth options
In an ideal world you’d think that executives would only go after growth initiatives that were beneficial or strategic for an organization, but we’ve all seen how pressure from demanding shareholders and investors and misguided incentives can push an organization to pursue growth at all costs even if doing so destroys value for shareholders and the team’s morale over the long term.
Those are typical cases of a bad business strategy, perfectly executed.
In general, a growth opportunity makes sense as part of your business’ strategy if a combination of the following conditions is met:
- It increases the company’s bottom line over time
- It produces an attractive return on investment (ROI),
- It leverages the company’s value chain,
- It builds a new critical capability, or
- It improves the business’ strategic positioning.
While a growth strategy can in general be defined as a group of business initiatives aimed at increasing a company’s bottom line, we prefer to talk about an executive plan for the strategic growth of a company, which contains the initiatives that the executive team has “handpicked” to maximize growth (Net Earnings or FCF) within a given time horizon.
But what are the options available to growth a company?
Through our research, we identified seven different strategies to create growth in any business:
- Market penetration: Selling more of your existing products to your existing consumers or targeting new consumer “segments” within the same markets.
- Market development: Selling your existing products into new markets or into new markets internationally.
- Product improvement: Improving your products and services serving existing customers (to reduce churn, more on that later).
- Product development: Creating new products and services to target existing customers or to enter new markets (which would qualify as some type of diversification move).
- Revenue optimization: Increasing revenues through the implementation of alternative pricing options or new business models on your existing products.
- Cost optimization: Reducing costs through the optimization of the business’s cost centers, by streamlining operations, or targeting inefficient uses of cash.
- Inorganic growth: Leveraging other companies’ assets through synergistic mergers, acquisitions or strategic alliances.
Your job as a company executive is to explore how this list relates to your organization and make educated decisions about which strategies you believe would deliver the most impact to your bottom line and make those part of your overall business strategy.
Not all growth activities will have the same impact on your business, and for that reason, you must narrow down the universe of initiatives that you could pursue from the list above to the handful that would deliver the most impact within your planning period.
That’s why your plan for growth must be “strategic”, meaning that your plan for “strategic growth” contains the collection of growth activities that you have deliberately selected.
Categorizing your strategic growth options
Consulting firm McKinsey & Company found that organizations that distribute growth efforts across three strategic buckets: Expansions, Creations (new businesses) and Optimizations, are best positioned to outperform their market peers over time.
This categorization is also useful to explain strategic growth sources in executive meetings, where people can see where the growth is really coming from, and can also help you make resources allocation decisions more intuitively.
The next section provides more detail on growth strategies. For a deeper analysis of this subject see our article on Innovation Strategy.
Innovation as Part of Your Business Strategy
Innovation is very important for organizations. It can help us create growth opportunities, find ways to reduce costs, increase revenues, eliminate competition and even create new markets.
But innovation alone is not a strategy. Neither is disruption. In the same way that product development, market share, brand or a good mantra are not strategies. Yet those words and a thousand others are thrown around as equivalents to strategy.
Innovation just is one of a long list of words that people use, sometimes irresponsibly, to make status statements.
The term has been so overused that it has almost lost its meaning, and has become merely a buzzword in the strategy world.
Saying that innovation is your strategy is like saying that people, or good products, are your strategy.
While product innovation (e.g. improving existing products or creating new ones) can be an extraordinary source of growth for some companies, it is not the only way and is by far the most difficult to get right.
In fact, it is the least successful form of growth with reports from Harvard Business Review pointing out that 19 of every 20 new products launches fail, a 5% success rate.
How innovation can become the linchpin of your business strategy
The connection that many seem to miss is that innovation, just like a good product or great people, can only help a business achieve its goals (i.e. maximizing its value for shareholders) in one of two ways: by helping differentiate its products and services, or by reducing costs, which bring us back to our strategy principles.
New business models and enabling technologies such as multi-sided platforms, digital channels, data analytics and artificial intelligence (all concepts whose strategic implications we review in detail in the book) can only give a company an edge if they help do one of those two things well: create unique products or reduce costs.
If a new technology or business model can’t do either of those two things for your business, they are just a waste of time and money, or a fancy word to throw out in business strategy reviews and earning calls.
From the list of growth paths above, we came down to the four different ways in which innovation can help an organization create growth and become part of your overall business strategy:
- Product improvement: Improving existing products and services that serve existing customers (which also helps with expansions),
- Product Development: Creating new products and services to target existing customers or to enter new markets
- Revenue optimization: Increasing revenues through new pricing options or business models, and
- Cost optimization: Reducing costs and improving operational effectiveness.
Innovation is a universe in itself, especially when it comes to the creation of new products and services, since you must continually make iterative decisions about the products you launch, the customers you target, the business models you test and so on.
At the end of the day, the collection of initiatives that you handpick end up becoming your innovation strategy.
We recommend maintaining a portfolio of innovations that cut across products, markets and business units, with a good estimate of when those innovations could make it to market.
Innovation, especially when it comes to the development of new products and services is one of the most exciting activities in any organization and the one that usually gets the most attention in strategy reviews.
But as we saw, it bears some risks and the failure rate is astonishing by all counts, which may, in the end, threaten the goals of your business’s strategy.
Three non-conventional growth strategies
So to wrap up this section we would like to review three alternatives to help you create innovative products without the risks that an in-innovation effort carries:
- Emulation: This is about becoming a “fast second mover” strategy rather than a pioneer. Fast seconds avoid the costs of Research and Development (R&D) and instead wait until opportunities have proven to work before jumping on wagon.
- Licensing: Striking licensing deals with developers of intellectual property to incorporate it into your products. These can range from the integration of a particular subsystem into your value chain (like a battery in a mobile device for example) to licensing entire products to be sold under your brands.
- Corporate Venture Capital or CVC: Investing in external entrepreneurial companies through a corporate venture capital effort, to gain privileged access to their technology and products.
As an executive and innovator, you must continually explore opportunities for value creation that could be forming around your markets and industries.
This will help you see future threats to your business which might be materializing in your markets and second, this continual scan of the market landscape can also serve you as a source of ideas for improvement of your current products or the creation of new ones.
Our final advice to you is to find ways to keep the innovation engine continually running in your company and at the core of your business’s strategy.
In all of its forms, be it as the development of new products and services or the optimization of your earnings, innovation should be a systematic effort, with clear governance and stages.
That’s how innovation can become a source of differentiation or, to use a classic term: a Competitive Strategy.
Business Strategy Template: A Map to Strategic Choices
So far, we have explored multiple ways in which you can achieve your strategic goals and maximize the value created for your shareholders, from the protection of the core business to expansions, innovations and optimizations.
We can tie up all the options we have discussed up to this point in a decision tree, and create a concise map to the different strategy choices that you have to make as a business executive:
You can now look at this strategy map and see a visual representation of the choices that you have to make when developing a new strategy for your business.
To download the most recent version of this strategy map click here.
Now, if you’ve been around long enough in the business arena, you know one thing about strategy: getting it right is one thing, but getting it done quite another.
Without those two disciplines well rooted in its DNA, your organization is at risk of not hitting its strategic goals or derailing from the desired target without even realizing it.
Both disciplines, as well as each of the seven paths to growth and the protection of core businesses are subjects covered in Strategy for Executives, which is now free to download here.
Business Strategy Examples
I’d like to wrap up this article with a collection of short examples extracted from the book, showing each of the strategies we have discussed above in action and applied to a real-life business:
The goal of a differentiation strategy is not to “compete” with rivals and take them out of business but quite the opposite: its goal is to avoid frontal competition by being unique, and a perception map as we saw earlier can help us do that.
For example, Dr Pepper Snapple Group (NYSE: DPS) owns more than 50 brands of flavored beverages including 7Up, Canada Dry, Snapple, Mott’s, Hawaiian Punch, Orange Crush and Sunkist, all of which occupy leadership positions in the very crowded and competitive refreshment drink shelves.
These products, however, are unique in what they offer and are positioned in their buyers’ minds as top brands in their respective categories, and DPS didn’t need to destroy Coke or Pepsi to achieve its position.
Strategic product re-positioning
If you find yourself in a dogfight over commoditized offers, you can still find a way out by focusing on narrower segments of customers or flipping to a low-price leadership strategy within that segment.
For decades since its introduction in the late 1800s Ivory, a soap bar manufactured by Procter & Gamble (P&G), enjoyed a privileged differentiation leadership position, being the brand that defined and resembled what “cleanness” meant in the soap category.
That position allowed P&G to command premium prices and retain a large share of the market for a long time.
But when new deodorant soaps and “beauty bars” like Dial and Dove, which featured deodorant and skin care ingredients, became serious competitors in the mid 60s, P&G decided to reposition its iconic brand to become the low-price leader in the soap market, rather than engaging in head-to-head competition with the new entrants.
The idea of repositioning is to zig when they zag. If low-price competition is tough, then slowly move onto a differentiated position or vice versa. If neither position works, narrow your target segment and move to a niche approach and restart the whole strategy process again.
That’s how you implement a fluid strategy in your business.
Low-price leadership and strategy
Companies pursuing a low-price strategy must make frugality their “religion” and a fundamental part of everything they do.
That low-cost mentality should translate into highly efficient business models and it will be the most valuable asset of low-price competitors.
In the case of Ivory, for example, the air bubbles that helped the soap float also helped reduce costs because the soap needed less materials, which in addition to basic wrapping, lack of deodorant and scent ingredients and low promotion, helped the product achieve costs advantages that other soap bars could not even dream of.
When competing on price, every penny counts.
Market penetration strategy
A company can increase its share in any market by selling more to existing customers or by targeting other segments within the same market.
For example, in the late 1970s, Miller’s Miller Lite beer was found to be markedly unpopular with men, the dominant consumer segment in the US.
Its less-filling texture made it widely popular with women, but the largest consumer segment, men, was not connecting with the product.
To make the brand more appealing to the male population, Miller invested heavily in an advertising strategy featuring popular male (and manly) athletes.
The market penetration strategy was a big success, positioning Miller Lite as a top-selling light beer in the US for almost twenty years.
Don’t forget that customer segments are just categorizations that YOU choose and there are many ways to go about it. So when a market is not growing, slicing it in a different way may help find new segments that could find the product valuable.
Market development strategy
When trying to target new markets, what you must look for is groups of people that could use the benefits of your solutions, but that for any number of reasons haven’t been targeted by your current market segmentation strategy.
Consider the strategy of Nestlé with its Nespresso machines, which multiplied sales of its coffee products and helped the company leapfrog in a very competitive coffee space.
Through Nespresso, Nestlé found a way to capture an entirely new market for its coffee: customers who preferred to make a great cup of fresh java at home, rather than having to get in their car or wait in line to buy one.
In this perfectly crafted business strategy, Nestlé created a great “vehicle” to deliver its coffee products making them a perfect match for each other, reminding us a bit of the success of Gillette’s famous razor and blade business model, where the company would make money from the blades, not the razor.
Strategic product improvements
This is the most common type of innovation and the one most people are familiar with. Things like “whiteness” in toothpaste, download speed in internet services, or storage capacity in computers are all good examples of linear product improvements, where every new product just offers more of it.
The problem with this type of innovation as your main product strategy is that over time this linear increase along common value dimensions can lead to the commoditization of those dimensions, which means that the gross of the market is no longer willing to pay premium prices for more value, which could end up hurting your business.
These customers already get more value in that dimension than they need, from any vendor, so they turn to price as the decisive factor to pick a product.
For example, it would be more difficult today to find customers willing to pay premium prices for greater whiteness in toothpaste, faster internet speed or more storage capacity in personal computers than it was 10 years ago, since now even the most basic offers deliver more than most people need.
The gross of buyers in those markets now turn to price to select vendors.
Strategic product development
We can cite many examples of products that when first launched created significant growth for their companies resulting in a wildly successful strategy for the business.
Some of the most notable cases include Sony with its Walkman and the PlayStation gaming console, Research In Motion (RIM) with its BlackBerry smartphone, Pfizer with Viagra, Apple and its mobile devices (iPod, iPhone and iPad), Tesla Motors with the Roadster model and now with the Model 3, Amazon and its Amazon Web Services (AWS) service and its Kindle eReader and General Electric with its GE Capital unit.
All these companies found extraordinary growth through these products, attracting enormous demand, especially from
Strategic optimization of revenues
When creating the strategy for a particular business, sometimes you may find new sources of revenue by experimenting with innovative business models and pricing options on your existing products, or through changes to the product’s value proposition.
For example, a few years ago Rolls-Royce launched a program for their jet engine products called TotalCare where customers would pay for every hour of uptime delivered by the engines, rather than paying an upfront fee.
Rolls-Royce then collects extensive operational data and performs proactive maintenance on the units to maximize uptime and minimize disruptions.
Through this program, Rolls-Royce expanded its business model to accommodate the needs of a segment of customers that could not afford hefty acquisition fees, but that could manage reasonable operational costs.
The program was a big success, helping Rolls-Royce increase its bottom line from a market that would be otherwise buying from other vendors.
Membership options, all-you-can-use, take-or-pay, freemium (a free basic version to promote a paid upgrade) and a no-question return policy are all forms of pricing and business models that seek to accommodate your company’s offering to the needs of a particular customer segment and should be taken into account when developing your strategy.
Strategic cost optimization
On the cost side, you must always be looking for opportunities to improve your overall business performance and finding better ways to use the resources of your organization, especially people and money.
This goes beyond the classic view on cost reduction strategies where managers monitor productivity and act reactively to correct deteriorating performance.
What we mean by cost optimization is actively looking for ways to reduce costs in a meaningful way, making your operations leaner and producing a positive net effect on your bottom line.
While it is true that some cost reductions may lead to a productivity drop, as long as the tradeoff seems to deliver a positive net effect to your bottom line, you should pay attention and deliberately decide what to do.
In other cases, you may just mine the data that your business produces to find strategic opportunities for cost reduction.
For example, package delivery company UPS developed an analytical model they call ORION (On-road Integrated Optimization and Navigation) which analyzes the deliveries that need to be made every day and provides drivers with the specific routes they must follow, including turn-by-turn instructions.
ORION reduces over 100 million miles and 10 million gallons of fuel for a combined saving of more than $400 million every year, which just as all other cost savings, drops directly to the bottom line.
The continual search for cost reduction opportunities in any corporation is like a discipline that you must religiously practice and over time get better at, because optimizing costs is always good business.
This must become part of your company’s strategy and could become a serious competitive advantage down the road with respect to other, less disciplined players in your markets.
Non-organic growth strategy
Inorganic (aka “non-organic”) growth strategy refers to a group of initiatives that rely on other companies’ resources to deliver growth to your company, rather than developing such resources yourself.
In most cases companies use non-organic alternatives as a way to achieve rapid strategic results, for example to catch-up in a market where the company was left behind, to access key assets and intellectual property, or to build synergies that would provide some kind of competitive edge.
Microsoft, for example, purchased both Skype ($8.5 billion) and LinkedIn ($26 billion) to access technologies and capabilities that would help the company build a platform for corporate services.
Although mergers and acquisitions (M&A) are by far the most common flavors of inorganic growth, there are other alternatives that can be just as effective such as joint jentures (JVs) and strategic alliances.
For example, car manufacturer Ford and clothing retailer Eddie Bauer joined efforts to create the widely successful “Ford Explorer Eddie Bauer Edition” in the early 1990s, which featured premium leather seats and other luxury perks, in an effort to compete with Japanese companies in the luxury SUV market.
Both JVs and strategic alliances are in essence a collaboration agreement between at least two companies to pursue a common set of goals, and are usually a cost-effective alternative to an acquisition or a merger.
Leveraging Corporate Venture Capital to boost your business strategy
A new trend that’s becoming increasingly popular is to make direct investments in early stage companies by creating a Corporate Venture Capital (CVC) arm inside your company to find and screen potential targets in need of seed, growth or expansion capital.
Through a CVC program, you create a fund to invest in startups in the form of equity. With this, your company becomes a shareholder in the entrepreneurial company as a way to keep a close watch on its developments and progress.
A CVC program is an in-house effort that allows you to seek (and be pitched by) startup companies with relevant technologies or business models in your business space.
Market research firm CBInsights reported that during 2017 alone Corporate Venture Capital groups provided over $30 billion of funding across 1,791 deals globally, a 19 percent increase with respect to the previous year.
Well-known corporations that have an in-house strategic CVC arm include Dell Technologies, Intel, Salesforce, Citigroup, Cisco, Comcast and GE, all of which have been very active over the last few years.
The way in which most CVC deals work is through direct acquisition of new shares of the target company.
These shares are usually issued in big chunks or “investment rounds” by the startup that’s seeking capital, and the corporation provides funds to the company in exchange for a portion of the shares, making the corporation a shareholder of the target.
One big benefit of playing the role of an investor is that you get to invest across a number of companies, some of which might actually be competitors in a particular market.
For example, through its Vision Fund, Japanese tech company Softbank Group has made important investments in both Lyft and Uber, two companies that are fighting fiercely for leadership in the ride-sharing market.
Independently of who wins the ride-sharing space there is one sure winner: Softbank.
Best Business Strategy Books
The content of this article has been extracted from Strategy for Executives™, a book that provides a fundamental, but practical, framework to understand and create a solid business’s strategy from scratch, applicable to the dynamic conditions that modern executives face in pretty much every market today.
There are many great business strategy books to choose from, including our all-time favorites The Innovator Solution by Clayton Christensen and Understanding Michael Porter by Joan Magretta, but why go through all these different frameworks and ideas, some of them outdated, when you can get a unified map to business strategy that incorporates all of them in a single framework?
Strategy for Executives, which is now free to download here, is based on extensive multi-year research, where we broke down the most popular strategy frameworks of the last 40 years, extracted their core ideas, and tied them all together into a single didactical and self-contained body of knowledge.
The research was led by Sun Wu, a seasoned Fortune 500 executive with more than 15 years of real-life experience, complemented by a thorough revision of more than 300 books and research papers, and over 500 hours of videos, interviews and formal training.
The result is a combination of fundamental concepts and a concise map to the strategy choices that modern executives have to make to thrive in today’s highly competitive markets.
Every concept in the book is explained from scratch so that, plain and simple, this is the only business strategy book that you and your teams will ever need.
Author: Sun Wu
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Magretta, Joan. Understanding Michael Porter: The Essential Guide to Competition and Strategy. Harvard Business Review Press. Kindle Edition.
Bishop, Todd. Jeff Bezos explains why Amazon doesn’t really care about its competitors. GeekWire. https://geekwire.com/2013/interview-jeff-bezos-explains-amazon-focus-competitors/
Kim, W. Chan; Mauborgne, Renée. Blue Ocean Strategy, Expanded Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant. Harvard Business Review Press. Kindle Edition.
Harvard Business School, Michael Porter on Competitive Strategy. Harvard Business School Video Series, 1988. https://www.amazon.com/Michael-Competitive-Strategy-Harvard-Business/dp/B006N0A2DG
Ahuja, Kabir; Hilton Segel, Liz; Perrey, Jesko. The roots of organic growth. McKinsey Quarterly. August 2017. https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-roots-of-organic-growth
Sherman, Leonard. If You’re in a Dogfight, Become a Cat!: Strategies for Long-Term Growth Columbia Business School Publishing, Columbia University Press. Kindle Edition.
Rolls-Royce website. https://www.rolls-royce.com/media/our-stories.aspx
Davenport, Thomas; Harris, Jeanne G. Competing on Analytics: Updated, with a New Introduction: The New Science of Winning. Harvard Business Review Press. Kindle Edition.
Report: Global CVC in 2017: A comprehensive, data-driven look at global corporate venture capital activity in 2017, CBInsights.