Business strategy is at the heart of firm competitiveness and value creation ability. Despite its importance, many entrepreneurs and companies design strategy based on inaccurate assumptions about markets or even themselves, which often causes them to get off track operationally, lose competitive strength and become trapped in inefficient patterns of resource use. To reduce strategy formation risk, this article discusses three steps firms can take to build better business strategy.

Strengthen Market Analysis

Regardless of whether they are just starting out or have been in business for decades, all firms have to define and carry out a business strategy. In simple terms, business strategy is the fundamental choice a firm makes about how it will achieve its core business objective, which typically is the creation of value over a certain period of time. This value can be defined in different ways, including in traditional economic terms (such as revenue growth, EBITDA growth or an increase in the firm’s value), qualitative measures of impact (such as helping the community or improving the environment) or some combination of these factors. The quicker and more efficiently this value is created, the stronger the strategy is.

Business strategy is the fundamental choice a firm makes about how it will achieve its core business objective.

Firms generally create strategy based on three factors:

• the structure, depth and direction of the market a firm is in
• the resources a firm has, including managerial talent, the skill set of the firm’s team, firm physical and intangible assets, firm contacts and capital
• the firm’s DNA, meaning the unique way that the firm carries out its business. This includes the firm’s organizational structure, leadership style and ways of reacting to opportunities and risks.

Market analysis is often comprised of several steps, including defining actual and potential market demand and market supply. These steps will be discussed in more detail in another article.

The two core elements of market analysis in the strategy formulation process are obtaining information and converting that information into a concrete strategy. While these steps seem straightforward, there is a wide continuum between firms (or even within firms) regarding how quickly and how effectively market analysis step is carried out.

For the purposes of developing strategy, market information should be representative of the market, relevant and timely.

Regarding market information, firms should be careful not to fall into the trap of making market assumptions based on limited or worse biased market data but rather systematically seek out a reasonably complete picture of the market. Markets are highly complicated and if data points to a simplistic view of the market, its direction and the forces that affect it, it is often a sign that the data is not complete.

Market data alone does not determine strategy; firms have to think through the significance of market information in defining the steps a business will take, what resources are needed and how those resources will be allocated going forward. This means determining not only what firms should do but when they should do it. This is a determination that should not simply be made once and then left in place without further reflection but rather continually reconsidered in light of evolving market conditions and firm performance. Actual experience is one of a firm’s most important strategic resources.

Further, as firms often have significant internal biases regarding data analysis, it is recommended that firms seek out critical feedback during the strategy formulation process to try to have a balanced view of the opportunities and risks involved in the firm’s proposed strategic direction.

The below graph illustrates the differences that can exist between firms in the information gathering and conversion processes. These differences can have a significant compounding effect on value growth and competitiveness, meaning that, all other things being equal, the competitiveness gap will widen over time.

Quality of Information	Quality of Information Conversion
Good	Good
Good	Not Good
Not Good	Good
Not Good	Not Good

Assume Market Shifts Rather Than Market Stability

Business strategy very rarely involves reaching a stationary business target. Just like a plane that is attempting to land on a ship on the ocean, the pilot must keep in mind many factors, including the trajectory and velocity of the plane and the trajectory and velocity of the boat. In the same way, a company needs to create a strategy that has the best chance possible of landing a plan on a moving ship, which involves considering the dynamic, interrelated forces that make up markets.

A core assumption in the strategy formation process should be that markets will go through significant change over the course of the strategy period.

There are four types of changes that typically affect firms over time:

• Social changes. These are changes that affect society as a whole, such as population growth, age shifts and technological changes.
• Macroeconomic changes. These are changes that affect the economy as a whole, such as GDP growth and inflation.
• Microeconomic changes. These changes include shifts in supply and demand and the structure of competition.
• Internal firm changes. These are changes that occur within a firm, including creating new departments, hiring and firing employees and changes in organizational resources.

Since neither these changes nor their impact on each other can be predicted with any degree of certainty, firms should attempt to design a strategy which allows them to thrive under a reasonable range of market conditions. In other words, rather than attempting to land a plane on one boat, a firm should strive to have the ability to land a plane on multiple boats under different types of weather conditions. This could include, for example, having the capability to sell products domestically or abroad or the sale of products at different price points.

Build Strategy on Unique Competitive Strengths

While markets constantly shift, all market factors tend not to move equally. For example, while macroeconomic conditions, such as GDP growth and the value of a country’s currency, may continually move up and down, some factors may be more inelastic than others. For example, firms with a reputation for excellent service may continue to experience a high demand for their products even when slower GDP growth causes general demand levels across the market to fall. Similarly, firms that are very strong at innovation may be able to react quicker to changing market conditions and not only retain their competitive position but also gain additional market share.

Based on this, as part of their strategy formation process, firms should take careful inventory of their skills sets and DNA and focus on differentiating factors that will ideally continue to give them a competitive advantage even as market conditions shift. Some examples of these factors are:

• ability to produce better products
• better access to resources than competitors
• having a more effective brand or marketing approach
• providing better customer service

Conclusion

Strategy formation is a key part of creating business value. While strategy risk cannot be eliminated, a well thought out strategy formation process can significantly reduce the risk that firms will drift off course. Keeping a firm’s strategic direction as close as possible to its optimal strategic trajectory given market conditions and the firm’s resources is an advantage that tends to generate compounding competitive benefits over time.

The image of the archers was taken from here.