Formulating a business strategy requires a lot of hard work, and that hard work should pay off in results for the company. Once a company has started a strategic process to formulate a business strategy, the company must then strive to ensure that the strategy will be effective. Obviously, there are no guarantees. However, we believe that companies can improve their chances of creating an effective strategy by simply avoiding a few classic mistakes. Below are a handful of the common mistakes my firm has seen most often in the strategic processes of companies.
Expectations are set too low. One misconception about business strategy that my firm seems to encounter routinely is that business results will not be affected by business strategy until years in the future. Business strategy is viewed by many of our clients as being a long-term endeavor. Of course, we disagree. We believe that an effective business strategy that is properly implemented can begin to have an impact on business results almost immediately. In fact, an effective business strategy should be formulated with targeted business results in mind, and the targeted business results should be stated against the market, not past company performance. For example, for companies that have shareholder value driven primarily by growth, we typically advise them to target an annual growth rate of approximately two times the overall growth rate of the market. For companies that have shareholder value driven primarily by profits, we typically advise them to target an operating margin of 3 to 5 percentage points above that of their major competitors. Using these types of targeted results, viewed against the overall market, helps to ensure that a business strategy, once formulated, will not be mundane. It will be formulated to achieve the desired results.
Not enough is known about the market and the segments within it. Oddly enough, we find that companies do not know a great deal about the market in which they do business. Most companies can approximate market shares of the major competitors in a market. Some companies can identify current market trends and project the impact on the market that those trends will likely have. However, few companies truly understand, for example, the buying factors of customers in the market, the differences in buying factors among the various market segments, and the importance of those buying factors to the customers. Detailed market analysis can be difficult, but it must be done to support a comprehensive strategic process.
Not enough is known about competition. Again, many companies know their major competitors, their product lines, their prices, promotions, etc. However, not many companies understand, for example, the cost structure of their competitors and how it compares to their own. Detailed knowledge of competitors is critical when trying to understand their business strategies and how those strategies fit with the buying factors within specific market segments.
Strategic market position cannot be truly differentiated from competition. This is perhaps the most common mistake that we see companies make. Many companies formulate their business strategy through their strategic process, and then produce a strategy statement that makes everyone feel comfortable. It is typically flexible, does not limit any future potential business opportunities, and unfortunately, makes them look very similar to every other company in the market. A strategy statement that does not demand competitive differentiation is truly not a business strategy that can be sustained over the long term.
Business strategy is not in synch with capabilities. To be effective, a business strategy must leverage the strengths of a company, and fit well with the company's internal capabilities and culture. If not, implementation of the strategy will be exceedingly difficult.
Formulating an effective business strategy requires a great deal of analysis, information, and deep thought, and in the end, there is no guarantee that the business strategy will be successful in the market. However, if companies set their strategic process to avoid at least a few of the classic mistakes that are typically made, their chances of success will be significantly improved.