Last updated August 1, 2022.
What is business strategy?
Corporate Business Functional strategy: For the purposes of this write-up, I want to keep the scope to strictly to business strategy as compared to corporate strategy or functional strategy e.g., marketing, product, sales, customer success, etc. The scope for business strategy I’m adopting is consistent to what Hamilton Helmer refers to in his book, The 7 Powers of Business Strategy, or Michael Porter across his breadth of his work. I am particularly fond of the following definitions:
- “[strategy is] a route to continuing power in significant markets” — Hamilton Helmer.
- “Strategy explains how an organisation, faced with competition, will achieve superior performance.” — Michael Porter.
- “A integrative set of choices that positions you on a playing field of your choice in a way that you win.” — Roger Martin.
The boundaries of business strategy: Business strategy is concerned only with how a business will find superior performance over long-term in a market. Stipulating the scope for what business strategy is will help improve the legibility of what is an often complex, bloated, and loaded topic.
- How one business unit seeks to win in one market.
A note for pre-product-market-fit businesses: The strategy for all businesses prior to achieving product-market-fit (PMF) should be to maximise their time talking to customers. Without PMF, building and scaling a business involves a lot more friction. As such, any and all efforts should be spent trying to understand customers, validating the opportunity space before exploring the solution space.
- PMF is not a requirement for building a business, but it is a requirement to build one capable of venture scale. Reforge’s Brian Balfour expresses this idea in series on his four fits of growth framework.
- Finding PMF is no mean feat, but involves living & breathing the customer development approach pioneered by Steve Blank and popularised by Eric Ries in The Lean Startup.
- PMF is out-of-scope for this write-up.
Competition necessitates business strategy: The absence of competition in a market is by definition a monopoly market. The one player in the market has absolute pricing power & can set prices, and in turn profits. When there are new entrant(s) in the market, it erodes the pricing power of the incumbent (see monopolistic competition) and thus their profits. How a business seeks to win in a market saturated with competitors is their business strategy.
Business strategy is about how to find, occupy, and grow a defensible position in the market: The post-PMF play is to define what the strategy is to win (and keeping winning) the market. Michael Porter expounds that “the essence of strategy is choosing what not to do”. This is easier said than done, but by preparing hypotheses to the following questions, it makes doing so a lot easier.
- What is your unique value proposition?
- How do you build your value chain such that you best create and deliver value to your ideal customers?
- How will you keep and grow a defensible position in the market?
The unique value proposition outlines where you choose to play and how you choose to win: The ingredients in a complete proposition include: product(s), unique value, and best-fit customers. What is the unique value that a business can bring to a defined set of customers?
The activities that make up your value chain form the capabilities required to deliver your unique value to your ideal customers: Michael Porter emphasises that businesses should not strive to be the best, but rather strive to be unique. This applies not only to the value proposition but also to how businesses architect their value chain. While Porter has his own framework for value chain, I am partial to Brain Balfour’s framework of the four fits for growth: market-product, product-channel, channel-model, and model-market.
- Finding fit in the value chain unlocks a multiplier effect where the whole is greater than the sum of its parts.
Building moats are how you will maintain and expand a defensible position in the market: A business’ moat refers to the set of conditions that create the potential for persistent positive differential returns. You can identify whether a moat exists or not by examining whether there is a both a benefit to the business and a barrier to competition:
- Benefit — manifests itself in the ability to raise relative prices or reduce relative costs resulting in augmented cash flows to the business.
- Barrier — occurs when no other participant in the market can arbitrage away the advantage a business has no matter what resource, expertise, or anything else they posses.
- Learn more about moats in Hamilton Helmer’s 7 Powers of Business Strategy
Example(s) of business strategy:
|Business Strategy||Position itself as an attractive substitute for Greyhound.||Release a faster, better chip three times faster than the industry norm.|
|Unique Value Proposition||A way more convenient way to get around at a price that wasn’t extraordinarily much greater than a Greyhound bus.||Deliver the benefits of the rapid state of advance in 3-D graphics more often by releasing a new chip every 6 months — instead of the industry-standard 18 months.|
|Value Chain||Opted for point-to-point routes c.f., hub & spoke of all other airlines. Operated only 737s to reduce costs re: maintenance and training, etc. No meals on the flight since it’s short. No travel agents, only on the site so their cost structure is dramatically lower.||Formed three development teams, which worked on overlapping schedules; it invested in massive simulation and emulation to avoid delays in the manufacturing of chips and in the development of software drivers; and over time, it regained control of driver development from the branded add-in board makers.|
|Power (Moat)||Scale economies.||Process power.|
|Outcome||The US’s airline with the highest passenger-miles.||Forbes named Nvidia “Company of the Year.”|
Strategy can only be proven “right” with hindsight: If a vision or mission speaks to the “why” behind a business, then strategy speaks to the “how”. There is no possible way to prove the validity of a strategy ahead of time, in many ways, it’s very much like making a bet. You can do as much research as you want, but at the end of the day, there’s not amount of research that will reduce the uncertainty to zero (or anything close to it).
- “No new idea in the history of the world has even been proven beforehand analytically” — Charles Pierce Sandberg.
Strategy should, therefore, be coherent and do-able: Richard Rumelt recommends that since strategy can be neither proven right nor wrong, it ought to be treated as a hypothesis that is continually tested & iterated upon over time.
- “Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole” — Richard Rumelt.