Why is strategy essential for companies?

What is strategy and why it is essential?

Strategy is defining what do we want to achieve (i.e. company goals), and how we are going to go forward from today’s perspective (specific actions with allocated time and resources). It is a plan of how the company will improve its performance and position itself well for success. A prerequisite for the plan is taking an assessment of how internal and external changes affect progress toward the strategic goals, while always having foresight on how the situation will develop in the future. Effectively, the end result is a strategic deployment plan portraying how the company is going to achieve its vision, prioritize objectives, improve performance and successfully compete in its respective market.

Dwight Eisenhower said: “Plans are worthless, but planning is everything”. This means that a strategic plan made well in advance may unfold differently than we had anticipated in various details and aspects. However, going through the planning process several times along the way means that we have explored many options and contingencies and that we are as prepared as we can be.

How is strategy created?

As a first step, there are two crucial parts of the analysis, with as many sub-analyses as the company finds appropriate, that should be analyzed throughout the process of strategy creation:

  • Outside-in perspective
    • Consumer analysis
    • Customer analysis
    • Competition analysis
    • Supplier analysis
    • Legislation / regulatory analysis (if applicable)
    • Market value chain development
    • Possible future threats (i.e. indirect competition market, entrance of new players, etc.)
  • Inside-out perspective
    • Operational performance (i.e. processes, back office, front office, etc.)
    • Financial performance
    • Internal capabilities (i.e. people, technology, resources, etc.)
    • Governance & organizational setup
    • Route to market
    • Marketing & Commercial performance

This is not an exhaustive list of the necessary analysis, and it varies by industry. However, in a majority of companies, these analyses would be required in one way or another. The width and depth of each of these analyses is something that makes the difference in strategy design. Being rigorous and transparent in each step of the analysis is potentially the most crucial principle during this phase.

Following the set of initial analysis, the company needs to assess its market position, competitive advantage and value proposition that it truly offers to its consumers (or customers), rather than one it thinks it offers. After all, perception is reality and the consumer (or customer) is the new king.  

Still, even if the company improves all the internal and external sub-optimal areas, as Marth Rogers says: “When your headlights aren’t on, the best rearview mirror available isn’t likely to improve your driving.”. So, the company needs to have defined the vision for the way forward.  

The next step would be to match the results of the analysis against the vision (or aspiration) of the company (owner). Some of the first priorities for the way forward may arise from such comparison. Here the company should focus on having answers for major dilemmas – Are we going to be active in M&A? Should we change our portfolio? Should we divest? Is there an opportunity on the market for JV? Should we grow organically, and if yes, vertically or horizontally? Is there some major threat (i.e. entrance of Lidl in FMCG retail back in 2018 and previous years)? In which sense and in what capacity can we innovate (because innovations are not a nice-to-have option, they are a must-have option in today’s business)?

Last, but not least, grouping all initiatives, objectives, ideas and solutions together, prioritizing them, putting them in a time horizon and assigning responsibilities is the final step. Call it a working plan, implementation plan, or strategy deployment, in it lays the art of strategic management.   

What are the essential ways to approach strategy creation?

We will start with another quote, this time with one of the most successful young entrepreneurs Mark Zuckerberg: “The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”.  

So, be bold, take risks. Be open-minded. Be transparent. Communicate and involve organization, both vertically and horizontally. Be flexible, adapt strategy if necessary. Do not hold to your “truth” by all means. Consult with third parties, other companies, other industries, people of trust. Admit mistakes from the past, encourage others to do the same. It is better to learn and grow from your mistakes than to sweep them under the rug.

How often should strategy be defined?

There is no straightforward answer. It depends on many factors – successfulness of current / previous strategy, industry that your company is in, level of development of your company, substantial changes in market dynamics, entrance of new players, shift in consumers’ behavior, etc. However, one thing is for certain, the time available is shortening. In the previous 20th century, the standard was to create a long-term strategy for the next 10 years or longer. In recent decades, this strategy timeframe was shortened to 3 to 5 years. Now, many companies find that 2 to 3-year strategies are optimal. One should tread lightly when defining the time period for their strategy and always remain flexible for adjustment given new developments.

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