Why Is Strategy Important ?

by Paul Simister on October 5, 2011

Have you ever asked yourself “Why Is Strategy Important ?”

What Is Strategy And Why Is Strategy Important?

I recently wrote about “What Is Strategy?”

The business strategy of a company provides the big picture that shows how all the individual activities are coordinated to achieve a desired end result.

It is through the strategy process that the overall direction of the business is set and is why strategy is important.

Strategy is based on the opportunities and threats in the outside world and the internal strengths and weaknesses of the business.

Your Strategy Is A Reaction To Environmental Changes That Have Happened Or You Expect To Happen

As the external environment changes, perhaps due to changes in customers or competitors or perhaps due to the wider PESTEL forces – political, economic, social, technological, environmental or legislation based – it is important to ask some fundamental questions in your strategy process.

The more the external environment changes, then:

  • The more opportunities there are likely to be for the well prepared company; but
  • The more threats the unwary and the unprepared will face.

Even if the basic business environment is stable, the actions and intentions of competitors change and companies need to review what is happening, prepare for any real or potential competitive manoeuvres and find new insights into ways to create value for customers.

Why Strategy is Important – The Sooner You Respond To Threats, The Better Your Profit

Why Is Strategy Important ?

 

The sooner you respond to threatening new conditions in the marketplace, as the diagram above shows, the more likely it that the business performance can be protected in the short term and the long term. Even if performance dips badly, as in curve B, effective implementation of the right business strategy can turnaround the business.

Leave the strategy development too late – when time and resources are too small – then the business can reach a tipping point where it loses the confidence of key stakeholders like customers, suppliers, employees and finance providers and it collapses.

This is why strategy is important.

Why Should A Company Spend The Time & Effort To Develop A Business Strategy?

First let me clear up a misunderstanding about business strategy.

Whatever you do in your business, you have a strategy because strategy emerges from actions as much as from formal strategic planning sessions.

I’m sure that you have an objective for your business, even if it is to just survival to earn a basic level of profit that allows you to feed and house your family.

And I’m sure that you do things in the business that you believe will move you closer to achieving your objective.

The problem is that the strategy you are following may not be very good if you haven’t gone through a considered process of gathering and analysing facts, opinions and trends.

Your strategy may not take into account clear threats from competitors, changing customer needs and priorities or difficulties in the business environment.

On a more positive note, you may not have spotted a great opportunity that could mean that your business has the potential to do much better.

Why You Need A Business Strategy

Certain things may give you the push to have a more formal and structured planning process for your business. It’s often a good idea to bring in a strategy consultant or business coach to help you and give you an independent, objective view of what is happening.

  1. Increased competition
    .
    If you have a new, big competitor who has just entered your market or is preparing to enter the market and has the potential to be a serious threat, it is the right time to take a good, hard look at your business and the way it should compete in the future.
    .
    Perhaps the new competitor has taken over one of the existing businesses (or even several in an attempt to consolidate your industry) and it’s clear that they have a very different approach to business and different goals.
    .
    Perhaps the new competitor has a different business model and has significant advantages to the customer.
    .
    Perhaps the competitor has entered the market from overseas and brings with them a major cost advantage.
    .
  2. Changes in customer needs, wants and expectations
    .
    Customers can be very fickle and what they look for can suddenly change.
    .
    Some years ago, one Japanese car manufacturer experienced a surge in demand because their car came with a cup-holder.
    .
    If the customer value criteria buyers use to make their buying decisions change – either adding or taking away one element, or the weightings between elements change – it is essential that the company reviews its offerings quickly and makes the necessary changes.
    .
  3. Poor performance and fear of failure
    .
    If the business suddenly starts to perform badly, then you can expect external stakeholders like the bank or third party shareholders to put pressure on the managers to take a detailed review of their business and put together a plan of action to improve future performance.
    .
  4. There is a strategy planning advocate
    .
    A new senior manager may have been recruited who is a big believer in strategic planning. Alternatively one of the influential existing managers becomes aware of the benefits of strategic planning – from reading a book on strategy or from talking to other people who have seen the benefits of strategic planning.

What Stops A Company Having A Better, More Formal Strategy?

  1. There is no recognised need – performance is very strong
    .
    If business is good, the assumption is that the management team is very effective, knows what it is doing and future performance will remain high. The inevitable question is “Why change a winning formula?” although that has led many companies to grow complacent and to lose any competitive edge.
    .
  2. There is no knowledge of how to put together a formal strategic plan or to hold effective strategy workshops.
    .
    There is an element of mystery about strategic planning and a feeling that it has to be more complicated than it really is. If the management team don’t know where to begin, and they don’t know a good strategy consultant or coach, they may be very reluctant to approach somebody else.
    .
  3. The management team has a closed mindset.
    .
    Unfortunately managers can become blinkered because they have spent so long in this one industry that they believe that there is only the one way to compete.
    .
    The logic is that if there is only one strategy that everybody uses, there is no value in reviewing or refining it. Instead it is much better to focus on operational improvements.
    .
  4. There is no strategy advocate.
    .
    If no one puts the idea forward, it won’t receive any attention.
    .
  5. There may be a fear of change.
    .
    A new strategy implies change and that can mean that people feel that they have as much to lose as they do to gain. On that basis, they may have little incentive to consider preparing a strategic plan.

What Strategy Do You Need?

I’m not a big fan of big, long, written strategic planning reports that are done once and never looked at.

First, you get tremendous value from the strategy process and stepping away from the day-to-day issues and looking at the long term future. Thinking about what may happen makes you much more aware of the symptoms of change to avoid the boiled frog problem.

Second, your strategy should normally focus on competitive strategy and how you can win customer preference over competitors. This is a strategy based on establishing a differentiation advantage.

Third, you want a short strategic plan that becomes a living document and guides the decisions and actions made by you and your team. As things change it is updated and kept constantly relevant to what is happening in the business.

Why Is Strategy Important?

It is the source of long term profits.

You are in a fight with competitors over the profitable business of customers and the battleground is uncertain and constantly evolving.

Chinese general and military strategist Sun Tzu said

“It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle.” (more strategy quotes)

Strategy is how you get to know your enemies, yourself and the terrain on which you will fight.

That’s why strategy is important.

Paul Simister is a business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of the ebook The Six Steps Profit Formula.

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