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Build a Better Business Case Solution Matrix Ltd®
Company business strategy explains how a firm
differentiates itself from competitors, how it generates
revenues, and where it earns margins.
Contents
Page TopContents
How Do You Know the Strategy Serves its Purpose?
Customer demand Sales revenues Repeat business volume
Business volume. Customer retention rate. Accessible market size
Average sale value RFP's received. RFP quality and size
Market share Market position Competitive win rate
Growth rate vs. competitors Margins vs. competitors Leading brand awareness
Gross profits Gross margin Operating profits
Operating margin EBIT and EBITDA Return on total assets (ROA)
How Do You Formulate a Strategy?
Five Steps to a Generic Business Strategy
Page TopContents
Strategy Building Step 1
Build on the Vision
Page TopContents
Strategy Building Step 2
Focus on Top Level Objectives
Page TopContents
Strategy Building Step 3
Plan Your Attack and Choose Your Battlefield
Strategy Building Step 4
Reality Check: Does the Model Stand?
Home > Encyclopedia > B > Business Strategy
Formulate a Winning Business Strategy, Model,Formulate a Winning Business Strategy, Model,
Strategic FrameworkStrategic Framework
How to Develop Business Strategy and Measure Strategic Impact in 5How to Develop Business Strategy and Measure Strategic Impact in 5
stepssteps
Business Encyclopedia ISBN 978-1929500109 © 2020 Solution Matrix Ltd All Rights Reserved
What is Business Strategy?
In competitive
industries, each firm
formulates a strategy it
believes it can exploit.
Textbooks sometimes
define business strategy
simply as a firm's high-
level plan for reaching
specific business
objectives. Strategic
plans succeed when they
lead to business growth,
a strong competitive
position, and strong
financial performance.
When the high-level strategy fails, however, the firm must either change its
approach or prepare to go out of business.
The brief definition above is accurate but, for practical help, many businesspeople
prefer instead a slightly longer version:
Business strategy is the firm's working plan for achieving its vision,
prioritizing objectives, competing successfully, and optimizing
financial performance with its business model.
The choice of objectives is the heart of the strategy, but a complete approach also
describes concretely how the firm plans to meet these objectives. As a result, the
strategy explains in practical terms how the firm differentiates itself from
competitors, how it earns revenues, and where it earns margins.
Strategies Reflect the Firm's Strengths, Vulnerabilities, Resources,
and Opportunities. And, They also Reflect the Firm's Competitors and
Its Market.
Many different strategies and business models are possible, even for companies in
the same industry selling similar products or services. Southwest Airlines (in the
US) and Ryan Air (in Europe), for instance, have strategies based on providing low-
cost transportation. The approach for Singapore Airlines focuses instead on brand
image for luxury and quality service. In competitive industries, each firm
formulates a strategy it believes it can exploit.
Formulating Strategy Is All About Meeting Objectives (Goals)
In business, the strategy begins with a focus on the highest level objective in private
industry: Increasing owner value. For most companies that is the firm's reason for
being. In practical terms, however, firms achieve this objective only by earning
profits. For most firms, therefore, the highest goal can be stated by referring to
"profits." The generic business strategy, therefore, aims first to earn, sustain, and
grow profits.
An Abundance of Strategies
Strategy discussions are sometimes confusing because most firms have many
strategies, not just a single "business strategy." Analysts sometimes say marketing
strategy when they mean the firm's competitive strategy. And, a firm's financial
strategy is something different from its pricing strategy, or operational strategy.
The firm's many strategic plans interact, but they have different objectives and
different action plans.
The Strategic Framework
The subject business strategy is easier to understand—to make coherent—by
viewing each one as part of a strategic framework.
The strategic framework is a hierarchy. At the top sits the firm's overall (or generic)
business strategy. Here, the aim is the highest-level business objective: earn,
sustain, and grow profits. Some may immediately ask: Exactly how does the firm
achieve it's profit objectives?
Firms in competitive industries answer the "how" question by explaining how the
firm competes. For these firms, therefore, the overall business strategy is rightly
called a competitive strategy. A "competitive strategy" explains in general terms
how the firm differentiates itself from the competition, defines its market, and
creates customer demand.
However, detailed and concrete answers to the "how" question lie in lower level
strategies, such as the marketing strategy, operational strategy, or financial strategy,
The marketing strategy, for instance, might aim to "Achieve leading market share."
Or, "Establish leading brand awareness." Financial strategy objectives might
include: "Maintain sufficient working capital" or "Create a high-leverage capital
structure."
Understanding the Strategic Framework
Indeed, most firms develop and use a rich and complex strategic framework. As a
result, business strategy formulations are more explicit when they focus on these
points:
Specific business objectives for each strategy. Identifying which goals in theframework have priority over others.
Mapping relationships between the various strategies. Showing, for example,which of them support others.
This article, therefore, presents business strategies as components of a strategic
framework.
Explaining Business Strategy in Context
Sections below further explain and illustrate business strategy in the context of
related terms and concepts. This article
Presents and compares working definitions for business strategy, genericstrategy, competitive strategy, top-level strategy, and strategic objective.
Explains why firms sometimes change strategies and how to measure changeimpact with selective income metrics such as EBIT and EBITDA.
Shows how to formulate the top-level competitive strategy in five steps, startingwith the founder's vision and building into a complete strategic framework.
Illustrates the quantitative business model role in validating a strategy proposal.
What
is a business strategy?
Purpose of the Strategy: How do you know the strategy serves its purpose
Strategy and the meaning of success.
How do firms know when to change strategies?
How do they know if the new plan succeeds?
How do you formulate a business strategy? Formulating a general businessstrategy in five steps.
Firstly, build on the vision.
Secondly, focus on the most critical objectives.
Thirdly, plan the attack, choose the battlefield.
Fourthly, take a reality check: Does the business model stand?
Fifthly, build a support structure: The strategic framework.
Related Topics
Brand, the branding process, and branding strategies: See Branding.
Pricing, pricing objectives, and pricing strategies: See Pricing.
Company profitability metrics. See Profitability.
Capital and financial structures. See Capital Structure, Financial Structure, andLeverage.
Strategies and the Meaning of Success
Business strategies
succeed when they lead
to business growth, strong
competitive position, and
strong financial
performance. Many
different approaches are
possible, but all are meant
to bring improvements in
these areas.
In highly competitive
industries, the firm's
officers and other senior
managers take a keen
interest in knowing precisely how well their strategies succeed in serving this
purpose. Interest is especially keen immediately after the company changes or
adjusts plans.
Dominos Pizza Changes Strategies. Was the New Strategy
Successful?
In 2009, for instance, managers and owners of Domino's Pizza, Inc. were
distressed because the firm had just had three years of negative sales growth and
shrinking market share. The firm was, in particular, losing market share to two
significant competitors, Papa John's and Pizza Hut.
Domino's operates in the "Quick Service Restaurant" (QSR) industry. Many people
call this industry, unkindly, the "Fast Food" business. The firm competes not only
with other Pizza restaurants, but also with restaurants with different menus such as
Subway, McDonald's, and Chick-Fil-A. This segment of the Restaurant industry
defines itself not by menus, but instead by the words "Fast" and "Quick."
Understandably, therefore, Domino's started with a strategy based on "Quick
Service Delivery." The firm excels in fast delivery, a point that separates Domino's
from its competitors. Nevertheless, in 2009, the strategy seemed to be failing.
In late 2009, therefore, the firm's new CEO chose to "re-center" strategy on pizza
quality. Market research showed that customers rated Domino's pizza taste as very
poor ("like cardboard"). As a result, by the end of 2009, the firm had substantially
improved the pizza recipe and launched a marketing program to bring this news to
the market. The question on January 1, 2010, was: Will the new strategy work?
The Results Are "In." Strategy Change Succedes.
Anxious for an answer, the firm began in Q4 2009 detailed tracking of the growth,
competitive, and financial metrics that appear in the next section. By the end of Q1
2010, the first results were "in." The measures in all three categories showed
remarkable improvement. Domino's took this as confirmation the new strategy was
succeeding.
Now in 2018, the firm continues to research and improve the pizza recipe, while
adjusting its marketing strategy at the same time. For this, the firm relies on its 8-
year tracking history with these metrics.
Measuring Success With Strategies
A new strategy or a strategic change is successful when the strategic plan itself is
undoubtedly responsible for one or more of the following measurable, tangible
results:
Firstly, Business Growth. Growth Means Increasing:
Secondly, Strong Competitive Position, Which Means Increasing:
Thirdly, Strong Financial Performance, Which Means Increasing:
Measure Strategic Impact Precisely
Notice that analysts measure the impact on financial performance with metrics that
focus on the firm's core line of business.
Domino's, for instance, prefers to measure strategic impact with EBITDA—Earnings
before interest, taxes, depreciation, and amortization. Domino's tracks EBITDA
because EBITDA and other selective income metrics measure strategic effects more
precisely than overall Net Income After Taxes.
The firm's strategy drives performance in the core line of business, after all, and
that is what strategic planners need to measure. "Bottom line" Net income,
however, also reflects factors other than core strategy: (1) revenues and expenses
from outside the core business, (2) accounting conventions such as depreciation,
and (3) taxes. These factors tend to "muddy the waters" when the analyst tries to use
Net Income to measure the impact of strategy changes.
Business strategy is the firm's working plan for achieving its vision, prioritizing
objectives, competing successfully, and optimizing financial performance with its
business model.
Strategy builders can find practical guidance in this definition. Notice that the
definition names four kinds of actions. With just a little imagination you can
probably see that these actions point rather directly to steps in a strategy building
process:
Exhibit 1. Formulating a generic competitive strategy in five steps.
This strategy building process is rational, straightforward, and likely to succeed—if
the strategy builder takes these steps in order.
Note that businesspeople rightly speak of strategy building as strategy formulation,
instead of "writing a strategy." The verb formulate suggests a building process that
is orderly or systematic and results that are definitive and precise.
Successful strategies build
on the founder's vision for
the business. For some
firms, the founders write a
formal vision statement.
Others list the core ideas
that give the business
substance, shape, and
direction.Either way, the
vision pictures the
essential nature of the
business: what it looks like
and what it does.
Strategy formulation Step
1 lays a foundation for the
strategy. Here, the strategy builder re-states several ideas from the founder's vision
for the business.
Offerings and value proposition.
Industry.
Customers and market.
The Firm's Offering and Value PropositionThe Firm's Offering and Value Proposition
The business strategy builds directly on the firm's offerings and its value
proposition. This proposition describes the goods and services the firm
sells, regarding the value they offer to the customer.
For instance, Dell began in 1984 with a value proposition that was unique atthe time. Dell promised to build a computer when a customer orders, exactlyas the customer wants it, and deliver it at a very competitive price.
For example, Boeing states the customer value proposition for its 747-8 aircraftvery briefly: "...more range, better fuel efficiency, and lower operating costs."
In brief, the value proposition explains why customers would buy from this
firm instead of the competition. In this way, the value proposition shows how the
firm creates customer demand and differentiates itself from competitors.
The Firm's Industry.
Naming the firm's industry sector help's identify the firm's competitors. And from
that, the strategy builder learns which strategies the firm must compete against in
the marketplace. The strategy builder's task is to understand which approaches
work well in the industry and which do not.
For example, Domino's Pizza operates in the Quick Service Restaurant industry.
That means its competitors are restaurants of various kinds that:
Firstly, deliver orders very quickly after ordering.
Secondly, price moderately.
Thirdly, provide a "family friendly" setting.
When Domino's changed strategies in 2009, it did so after reviewing the
approaches of its competitors, Papa John's, Pizza Hut, Subway, Chick-Fil-A,
McDonald's, and others.
Note that a single firm can operate in several industries. Apple, for instance,
operates in at least five industry sectors: Computer hardware, Computer software,
Consumer electronics, Digital distribution, and Silicon Design. Apple faces a
different set of competitors in each of these industries.
There are, incidentally, quite a few industry classification schemes, or taxonomies,
in use, worldwide. However, for strategy builders, all that matters is that the firm
refers to a system that identifies the firm's competitors accurately.
The Firm's Customers and Market
Identify first the firm's customers as either consumers or businesses. This distinction
is essential for strategy builders because consumers and business firms buy for
different reasons. They have different criteria for deciding what and when to
purchase. And, they respond differently to seller pricing strategies.
Identify also the target market for the firm's offerings and value proposition. Note
that markets can have quite a few defining characteristics.
When customers are consumers, marketers define the market with factors suchas gender, age, occupation, economic status, work experience, education,geographic location, or special interests.
If, however, the firm sells to other businesses ("business-to-business," or B2B), itmay define its market by factors such as customer industry, customer businessmodel, or manner of selling.
Businesspeople sometimes
ask: What is the purpose
of the strategy? The
answer has to name a
business objective. The
strategy's reason for being
is to explain how the firm
achieves specific goals.
Strategy formulation
continues in Step 2 by
naming tangible top-level
of business objectives and
explaining how to measure
progress towards meeting
them.
The generic business strategy explicitly addresses the firm's most important goals.
As a result, Strategy formulation Step 2 is a matter of specifying the firm's highest
level objectives.
Top Level Objectives in Private Industry
For firms in private industry, the highest level objective is increasing owner value.
For most businesses that is the firm's reason for being. Note, however, that firms
achieve this objective only by earning profits. And, there are only two ways they
can use the period's profits to increase owner value:
Firstly by distributing some or all profits directly to shareholder owners asdividends.
Secondly, by keeping some or all profits as retained earnings, thereby buildingowners equity on the Balance Sheet.
Because firms increase owner value primarily by earning profits, the supreme goal
itself reduces to a profit statement: The firm's primary objective is to make, sustain,
and grow profits. From this, it follows that a private firm's general business strategy
is explicitly designed to enable the business to create, continue, and increase
profits. Top Level Objectives in Government or Non-Profit Organizations
Most government and non-profit organizations, of course, do not exist to meet
profit objectives. A few—such as Postal Services, licensing agencies, or lottery
commissions—do generate revenues and try to earn enough to cover their
expenses. However, for these and all other government and non-profit firms,
critical strategic objectives derive from mission statements.
Example: Top Level Objectives for Government Department
For instance, the Department of Transportation in the US State of Oregon (ODOT)
has the following mission statement:
ODOT Mission: To provide a safe, efficient transportation system that
supports economic opportunity and livable communities for
Oregonians.
From this, ODOT derives five critical strategic objectives: (1) Safety, (2) Mobility, (3)
Preservation, (4) Sustainability, and (5) Stewardship. ODOT further explains the
meaning of each objective in concrete terms. And, it provides tangible
performance measures for each goal, which are useful for developing the
Department's strategy. In this way, performance measures also help set targets, plan
budgets, and evaluate Department performance.
Mission Statements and Values in Private Industry.
Some businesspeople are not pleased when they think they have just heard that
their firm's "only" objective is "earning profits." They are displeased because many
firms have mission statements, value statements, and creeds that point to still
higher objectives. People understandably ask whether strategy builders should
place these objectives on the same high-level as the profit objective.
Example: high-level Values at Johnson & Johnson.
Consider, for instance, the credo for Johnson & Johnson, a producer of medical
devices, pharmaceuticals, and packaged goods. The J&J credo presents four
responsibilities:
"Our first responsibility is to the doctors, nurses, and patients, to mothers andfathers and all others who use our products and services."
"Secondly, we are responsible to our employees, the men, and the women whowork with us throughout the world.
Thirdly, we are responsible to the communities in which we live and work andto the world community as well.
Our final responsibility is to our stockholders.
The firm takes these responsibilities seriously. J&J displays the credo prominently in
corporate buildings and on corporate grounds. And they emphasize these values in
communications and reports. J&J describes them as "values that guide our decision-
making." As a result, the firm tracks its success in meeting these responsibilities
with surveys and performance indicators.
Are Important Values Strategic Objectives?
Their importance notwithstanding, high-level mission statements and values like
these are not part of the firm's generic business strategy. They do not use these
values to differentiate themselves from competitors. For that, J&J relies on a "Broad
differentiation" strategy to distinguish itself from competitors and create customer
demand. The set of values, on the other hand, help shape the ways the firm designs
and implements lower-level strategies, such as its marketing strategy or its
operational strategy,
For firms in competitive
industries, the high-level
generic strategy is
necessarily a competitive
strategy. In most cases, the
selected approach results
from two choices. The
strategy builder must
choose:
Firstly, a plan ofattack, which is thegeneral approach fordifferentiating the firmand its offerings fromthe competition.
Secondly, thebattlefield, which is the specific market and market focus where competitiontakes place.
Strategy formulation Step 3 addresses the "How" question: Exactly how does the
company achieve objectives? For firms in competitive industries, the question
becomes this: Specifically, how does the company win against competitors, create
customer demand, and earn, sustain, and grow profits? For these firms, the generic
business strategy is a competitive strategy.
Plan the Attack
For many decades, textbooks and business articles have put forward the idea that
strategic planners have essentially only two possible plans of attack: Firstly,
differentiation and secondly, cost leadership.
Firstly, They May Choose Differentiation:Firstly, They May Choose Differentiation:
Here, the firm provides uniquely desirable products and services. Firms that choose
a differentiation strategy to create and communicate uniqueness through one or
more of the following::
Creating new products or services.
Adding unique features or capabilities to existing products
Achieving brand strength, communicating desirability, exclusiveness, superiordesign, or high quality.
Pricing to undersell the competition.
Secondly, They May Choose Cost LeadershipSecondly, They May Choose Cost Leadership:
Firms that pursue cost leadership goals minimize their production and selling costs.
Companies with a "cost leadership" strategy can charge industry average prices and
still earn handsome profits because their costs are lower than the competition.
However, firms using cost leadership may also add an element of differentiation by
selling at lower prices. Even so, they can still realize acceptable margins because
their costs are low.
Michael Porter's Generic Strategies
Discussions on business strategy usually refer to several ideas of Michael Porter.
These stem primarily from Porter's books, Competitive Strategy1 (1980) and
Competitive Advantage2 (1985). Porter's approach adds a second choice for
strategy builders: the scope of the attack against competitors.
Choose the Battlefield
Porter's system allows strategy builders to select between attack plans
"Differentiation" and "Cost leadership," but also to choose the level of market scope
for competitive activities. The strategy may target a broad market, or it may target a
narrowly focused market.
As a result, under Porter's system, the strategy builder chooses from four generic
competitive strategies. Exhibit 1 shows the possibilities.
Source of Competitive Differentiation
Cost Leadership Differentiation
MarketScope
Broad Cost Leadership Strategy Broad Differentiation Strategy
Focused Cost Focus Strategy Differentiation Focus Strategy
Exhibit 1. Michael Porter's Four Generic Competitive Strategies
Choosing the Best Strategy
In competitive industries, each firm chooses the strategy it believes it is best
prepared to exploit. Making that judgment, however, calls for excellent and
detailed knowledge in several different areas.
Firstly, the Strategy Builder Considers the Firm's Strengths,
Vulnerabilities, Resources, and Opportunities.
Strategy builders, in other words, need access to information about their firm—
some of which is public, and some of which is probably proprietary, or "inside"
information.
Areas of strength might include, for instance, the firm's capabilities in design,research, development, service delivery, or efficient production. Otheradvantages might involve an existing market presence, strong branding, oreffective sales and marketing.
Vulnerabilities might include specific weaknesses, inabilities, or ongoingproblems. The firm might be struggling with cash flow problems and a shortageof working capital. Or, it may operate with a high-leverage capital structure—making it vulnerable to business slowdowns or other changes in the economy.Or, the firm may be unable to bring new products to market quickly.
Resources might include, for example, existing production capacity and theinfrastructure to support it, or existing service delivery capabilities. Resourcesmight also include access to capital, or sufficient working capital for productresearch and development, marketing programs, or infrastructure upgrades.
The firm might see opportunities in the form of a failing competitor, or anexpanding market, or an idea for an entirely new product.
Secondly, the Strategy Builder Tries to Understand the Firm's
Competitors and Their Strategies.
The strategy builder identified the firm's industry in Step 1 (Build on the vision).
Naming the industry sector helps identify the firm's competitors.
Understanding the competition begins by identifying which competitors hold asignificant share in the firm's target markets.
It is essential to know which of these are gaining market share, losing marketshare, or merely holding market share.
From this, the strategy builder finds which strategies are working in this market, and
which are not.
Incidentally, firms cannot hide their generic strategies from competitors. One firm
can reasonably deduce the strategic plan of another from knowledge of the
competitor's product history, pricing history, and marketing messages.
Thirdly, the Strategy Builder Tries to Understand the Dynamics of the
Firm's Target Market and Its Customer Base.
In Step 1 (Build on the vision), the strategy builder also states the firm's offerings, its
value proposition, its target customers, and its target market.
The strategy builder will try to understand first the buying behavior of the firm'scustomers by understanding what defines "value" for these customers: Theymay shop for price, for the brand, or they may judge "value" by other criteria.
Understanding the dynamics of the target market will also be necessary forStep 5 (Reality check: Does the business model stand?). For this, the strategybuilder needs to know, especially, market size and market growth rate.
Strategy Exists When the Business Model Exists
Knowledge in the above areas may be considered the necessary "background" for
choosing and building a strategic plan. From this, strategy builders sense intuitively
which general strategy will serve the firm best. And they may at this point have
some sense of how the firm will differentiate itself and create customer demand.
This much, however, is not yet a strategy.
The strategy will be ready
to "go to market" only
after it validates with a
quantitative business
model.
Strategy formulation Step
4 completes the general
business strategy by
developing the business
model inherent in the
strategic plan. Here, the
challenge is to build a
quantitative model,
implied by the approach,
that is realistic and
credible.
The Model Serves As a "Reality Check" For the Generic Strategy.
For this, the strategy builder uses the background knowledge from Step 3 along
with realistic sales and cost assumptions to build a quantitative business model.
The resulting model shows whether or not a proposed strategy can bring desirable
sales revenues, margins, and profits.
The Model Also Serves As a Basis for the Firm's Business Plan
When the firm chooses to implement the strategy, the model becomes the
cornerstone of the firm's business plan. In that capacity, the model also supports
the forecasting of sales revenues, costs, margins, and profits.
Example: Two Firms, Two Strategies, Two Business Models
In its purest form, the business model looks like a very brief version of the firm's
Income statement. Like the Income statement, the model starts with sales revenues.
Estimated expenses are subtracted from these to create margins and profits—gross
profit, gross margin, operating profit before taxes, and operating profits and margin
after taxes.
Exhibit 2 shows two models, from two different firms, each with its generic strategy.
Figures are in $1,000s.
Exhibit 2. Business models for firms Alpha and Beta.
Each firm develops its model from its generic strategy
proposal. The models rely on sales and cost assumptions
they believe are reasonable.
Building the Quantitative Model
Before comparing the Alpha and Beta models, it will be helpful to discuss briefly
how the strategy builder creates the model from a strategy proposal and the Step 3
background information. The quantitative model with profits and margins develops
naturally when the strategy builder makes these estimates:
Firstly, target product revenues and target services revenues.
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Page TopContents
Page TopContents
Strategy Building Step 5
Build the Strategic Framework
Market size.
Accessible market % of total market
Alpha's market share.
Major competitor's market share.
Demand as a function of pricing.
Branding strength
By Marty Schmidt
Secondly, expenses necessary to earn target revenues in these expense areas:
Cost of Goods sold and Cost of services.
Selling expenses.
Administrative and general overhead expenses.
Forecasting Target Revenues for the Model
The strategy builder creates target revenue forecasts from knowledge of:
Market size and current sales of similar products and services in this market.The proposed strategy will either focus on a narrow market or a broad market.
The firm's likely market share and competitors' market share.
Market growth rate.
The firm's ability to differentiate itself from the competition under the possiblestrategy. Also, the firm's ability to benefit from strong branding under thestrategic plan. The firm will differentiate either by unique product attributes,branding or through low-cost pricing.
Forecasting Target Expenses for the Model
The strategy builder forecasts expense forecasts from knowledge of:
Target revenues and the firm's current Cost of goods sold or Cost of services.
The firm's current cost structure.
Cost structure changes under the proposed strategy.
Alpha's Strategy: Broad Differentiation
Firm alpha has chosen to propose a broad differentiation strategy. The firm intends
to differentiate itself primarily in these terms:
Strong branding emphasizing product quality, "cutting-edge" design, anddesirability. Branding efforts will communicate product qualities central to thefirm's value proposition.
Unique product features and capabilities. For these, Alpha intends to achievemarket penetration and market leadership by being "first to market."
With successful branding, moreover, Alpha believes it can charge premiumprices and still sell successfully in a vast market.
Alpha's model in Exhibit 2 shows the likely results of applying this strategy: Gross
margins for products and services are relatively high (37% and 30%, respectively).
However, Alpha's expenses for selling, administration, and overhead are also
relatively high. Therefore, despite the high gross margins, the overall after-tax net
(operating) profit margin is only 5.0%
Beta's Strategy: Cost Leadership in a Broad Market
Firm beta has chosen to propose a cost leadership strategy, targeting a broad
market. For this, Beta will differentiate itself from competitors by selling at prices
below industry averages. Success with the strategic plan depends on keeping
expenses low.
Applying this strategy, Beta forecasts lower gross margins than Alpha for products
and services (21% and 10%, respectively). Nevertheless, Beta's lower cost structure
still results in an overall after-tax net operating profit margin of 5.0%
Does the Model Stand?
Should either firm choose its proposal strategy? The answer depends on these
considerations.
Firstly, the model's credibility. The forecast margins are credible as long as therevenue and expense estimates are plausible. To enhance believability, themodel builders will probably provide:
Conservative revenue estimates—realistic, but lower than the firm's mostlikely revenue estimates.
Pessimistic expense estimates—realistic, but somewhat higher than thefirm's most likely cost estimates.
Secondly, the acceptability of the forecast profits and net profit margin.
Alpha, for instance, forecast net profits of $7,505,000 and a net profit margin of
5%. Because the general strategy objective is to increase owner value by earning,
sustaining, and growing profits, Alpha will have to decide whether these results are
"Excellent," "Just acceptable," or "Unacceptable." Here, Alpha will judge
acceptability by using model results to address other questions:
Are these profits and margins sustainable? Do they point to continued growth?
Do these profits support the firm's targets for retained earnings growth? Fordividend payments?
How do these profits impact profitability metrics and valuation metrics, such asearnings per share (EPS) and return on assets (ROA)?
Firms succeed partly
because their high-level
generic strategies are
successful. Generic plans
need support, however,
from quite a few lower
level strategies. Strategy
formulation Step 5
completes the strategic
framework that supports
the general strategic plan.
Success with the highest-
level strategy is due to the
underlying product strategy, branding strategy, and operational strategy, for
instance, to name just a few.
The Strategic Framework
Apple, Inc., is a highly successful company that makes the best of a highly
successful strategy. Industry analysts typically describe Apple's general strategic
plan as follows:
"Apple’s general approach is broad differentiation. This generic
strategy focuses on key features that differentiate the firm and its
products from competitors. Through the broad differentiation generic
strategy, Apple stands out in the market.
For example, emphasis on elegant design combined with user-
friendliness and high-end branding effectively differentiate the firm.
The broad differentiation generic strategy means that Apple always
aims to set itself apart from competitors not by price but by other vital
features beneficial to customers."
— Pauline Meyer, The Panmore Institute, 20173
Note that explaining exactly how Apple differentiates itself calls for a description of
Apple's product strategy and its branding strategy. Success with these strategies,
however, depends on the presence of successful plans for pricing, selling,
operations, product production, product distribution, and customer satisfaction.
Generic strategies succeed, in other words, because they sit at the top of a
complete strategic framework. The framework components are lower-level
strategies, their objectives, and their action plans. Note that individual strategic
plans impact each other for this reason: the goals for each strategy support also
objectives for different strategies.
Building the Framework: Focus on the Objectives.
Exhibit 3 shows the top two levels in one firm's strategic framework.
Exhibit 3. The first three lower-level strategies immediately under the higher-level
general strategic plan are, for many companies, (1) The marketing strategy, (2) the
operational strategy, and (3) the strategic financial plan.
The second-tier strategies cover the inventory of objectives that must be met, to
make the quantitative business model "work." These objectives were assumptions
for the model builder. For the strategy builder, they now become targets to achieve
with lower level strategies.
Example: Second-Tier Objectives and Strategies for Company Alpha
In its Exhibit 2 business model, for instance, Company Alpha forecast product
revenues of $100,000,000. To achieve $100 million in product revenues, however,
the model builder had to make quite a few assumptions.
Marketing and Sales Assumptions Become Target Objectives
To forecast sales revenues, Alpha made quantitative assumptions about the
following:
Calculations using these numbers lead to the forecast first-year sales revenues of
$100,000,000. As a result, Alpha's marketing strategy must plan and achieve the
assumed target values, by making each assumption an objective for the marketing
strategy.
It is clear at this point that reaching marketing strategy objectives, calls for another
tier of lower level strategies. Alpha will pursue the strategic marketing objectives
through its product strategy, branding strategy, and advertising strategy, for instance.
Operational and Financial Assumptions Become Target Objectives
To estimate revenue and expense figure estimates for the model, Alpha also had to
make quantitative assumptions about many of the factors in Exhibit 3 under
"Operational" and "Financial" strategies.
Alpha had to assume it will have sufficient working capital to pursue necessaryproduct research and development. Working capital is an objective for theFinancial Strategy,
Alpha also had to make assumptions about efficiency levels in productproduction, selling, and administration. These become objectives under"Operational Strategy," which are the targets of specific lower level strategiessuch as the selling strategy, or the inventory management strategy,
When is it Time to Change Strategies?
Quite a few firms started in business with competitive strategies that were initially
very successful, but which began to fail in the aftermath of changes such as the
following.
Competitors enter the market or bring new products to market
Technologies change.
Customer demand changes.
For firms that know where to look, strategies do give early warning when failure is
underway. The challenge is knowing what to change and how to change it. In most
cases, the road back to a successful strategy begins with adjustments to existing
lower level strategies—not a rejection of the entire top-level generic competitive
plan.
Changing Strategies at Research in Motion (Blackberry)
For example, the Canadian firm Research In Motion dominated the mobile
smartphone market for much of the first decade of the 21st century with its
Blackberry devices. RIM's successful strategy included unique product features,
excellent messaging performance, and security. Another focus of RIM's strategy
was its "Enterprise model." For this, the firm focused more on selling to corporate
buyers and less on marketing to end-user consumers.
Most businesspeople know well how quickly RIM's market share fell after Apple
introduced the iPhone in 2007. The fall continued as still other competitors entered
the smartphone market shortly afterward. For a few years, the RIM firm (now re-
named Blackberry) struggled to recover success with its existing product strategy
and the Enterprise model. Only much later did the firm fully embrace the idea of
changing strategic places. As of 2017, the firm is still struggling to find a new
generic competitive strategy that works.
Changing Strategies at Domino's Pizza
An example above describes the more successful strategic changes made at
Domino's Pizzha in 2009. At that time, management and shareholders were
worried because the firm had suffered three years of negative sales growth and
shrinking market share. Domino's operates in the "Quick Service Restaurant" (QSR)
industry—an industry segment defined not by restaurant menu, but instead by the
words "Fast" and "Quick." For this reason, the firm's strategy in 2009 focused
primarily on "Quick Service Delivery." However, even though the firm excels in fast
delivery, the strategy was failing.
At Domino's, it took the arrival of a new CEO to take action, quickly, and make
strategic changes. The story of the resulting success appears above. What is crucial
to emphasize was the nature of the change process. Domino's changed little about
its generic competitive strategy. More accurately, Domino's merely adjusted its
product strategy—refocusing marketing and branding emphasis to taste and quality
of the menu.
Lessons from Domino's and Blackberry
Both firms in the examples—Domino's and Blackberry—suffered several years of
declining market share before taking action to change or adjust the strategy. From
this experience, however, Domino's has learned the importance of paying close
attention to the extensive set of performance metrics appearing above in the
section Purpose of the Strategy.
A few these will give early warning—before the others—that one or more specific
components of the strategic framework are beginning to fail. At this point, before
the entire business fails, the firm may be able to reverse decline through carefully
monitored adjustments to these framework elements.
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