Every business leader wants their organization to succeed. Turning a profit and satisfying stakeholders are worthy objectives but aren’t feasible without an effective business strategy.
To attain success, leaders must hone their skills and set clear business goals by crafting a strategy that creates value for the firm, customers, suppliers, and employees. Here's an overview of business strategy and why it's essential to your company’s success.
Access your free e-book today.DOWNLOAD NOW
What’s a Business Strategy?
Business strategy is the strategic initiatives a company pursues to create value for the organization and its stakeholders and gain a competitive advantage in the market. This strategy is crucial to a company's success and is needed before any goods or services are produced or delivered.
According to Harvard Business School Online's Business Strategy course, an effective strategy is built around three key questions:
- How can my business create value for customers?
- How can my business create value for employees?
- How can my business create value by collaborating with suppliers?
Many promising business initiatives don’t come to fruition because the company failed to build its strategy around value creation. Creativity is important in business, but a company won't last without prioritizing value.
The Importance of Business Strategy
A business strategy is foundational to a company's success. It helps leaders set organizational goals and gives companies a competitive edge. It determines various business factors, including:
- Price: How to price goods and services based on customer satisfaction and cost of raw materials
- Suppliers: Whether to source materials sustainably and from which suppliers
- Employee recruitment: How to attract and maintain talent
- Resource allocation: How to allocate resources effectively
Without a clear business strategy, a company can't create value and is unlikely to succeed.
To craft a successful business strategy, it's necessary to obtain a thorough understanding of value creation. In the online course Business Strategy, Harvard Business School Professor Felix Oberholzer-Gee explains that, at its core, value represents a difference. For example, the difference between a customer's willingness to pay for a good or service and its price represents the value the business has created for the customer. This difference can be visualized with a tool known as the value stick.
The value stick has four components, representing the value a strategy can bring different stakeholders.
- Willingness to pay (WTP): The maximum amount a customer is willing to pay for a company's goods or services
- Price: The actual price of the goods or services
- Cost: The cost of the raw materials required to produce the goods or services
- Willingness to sell (WTS): The lowest amount suppliers are willing to receive for raw materials, or the minimum employees are willing to earn for their work
The difference between each component represents the value created for each stakeholder. A business strategy seeks to widen these gaps, increasing the value created by the firm’s endeavors.
Increasing Customer Delight
The difference between a customer's WTP and the price is known as customer delight. An effective business strategy creates value for customers by raising their WTP or decreasing the price of the company’s goods or services. The larger the difference between the two, the more value is created for customers.
A company might focus on increasing WTP with its marketing strategy. Effective market research can help a company set its pricing strategy by determining target customers' WTP and finding ways to increase it. For example, a business might differentiate itself and increase customer loyalty by incorporating sustainability into its business strategy. By aligning its values with its target audiences', an organization can effectively raise consumers' WTP.
Increasing Firm Margin
The value created for the firm is the difference between the price of an item and its cost to produce. This difference is known as the firm’s margin and represents the strategy's financial success. One metric used to quantify this margin is return on invested capital (ROIC). This metric compares a business's operating income with the capital necessary to generate it. The formula for ROIC is:
Return on Invested Capital = Net Operating Cost After Tax (NOCAT) / Invested Capital (IC)
ROIC tells investors how successful a company is at turning its investments into profit. By raising WTP, a company can risk increasing prices, thereby increasing firm margin. Business leaders can also increase this metric by decreasing their costs. For example, sustainability initiatives—in addition to raising WTP—can lower production costs by using fewer or more sustainable resources. By focusing on the triple bottom line, a firm can simultaneously increase customer delight and margin.
Increasing Supplier Surplus & Employee Satisfaction
By decreasing suppliers' WTS, or increasing costs, a company can create value for suppliers—or supplier surplus. Since increasing costs isn't sustainable, an effective business strategy seeks to create value for suppliers by decreasing WTS. How a company accomplishes this varies. For example, a brick-and-mortar company might partner with vendors to showcase its products in exchange for a discount. Suppliers may also be willing to offer a discount in exchange for a long-term contract.
In addition to supplier WTS, companies are also responsible for creating value for another key stakeholder: its employees. The difference between employee compensation and the minimum they're willing to receive is employee satisfaction. There are several ways companies can increase this difference, including:
- Increasing compensation: While most companies hesitate to raise salaries, some have found success in doing so. For example, Dan Price, CEO of Gravity Payments, increased his company's minimum wage to $80,000 per year and enjoyed substantial growth and publicity as a result.
- Increasing benefits: Companies can also decrease WTS by making working conditions more desirable to prospective employees. Some offer remote or hybrid working opportunities to give employees more flexibility. Several have also started offering four-day work weeks, often experiencing increased productivity as a result.
There are several ways to increase supplier surplus and employee satisfaction without hurting the company's bottom line. Unfortunately, most managers only devote seven percent of their time to developing employees and engaging stakeholders. Yet, a successful strategy creates value for every stakeholder—both internal and external.
Crafting a business strategy is just the first step in the process. Implementation takes a strategy from formulation to execution. Successful implementation includes the following steps:
- Establish clear goals and key performance indicators (KPIs)
- Set expectations and ensure employees are aware of their roles and responsibilities
- Delegate work and allocate resources effectively
- Put the plan into action and continuously monitor its progress
- Adjust your plan as necessary
- Ensure your team has what they need to succeed and agrees on the desired outcome
- Evaluate the results of the plan
Throughout the process, it's important to remember to adjust your plan throughout its execution but to avoid second-guessing your decisions. Striking this balance is challenging, but crucial to a business strategy's success.
Learn More About Creating a Successful Business Strategy
Business strategy constantly evolves with changing consumer expectations and market conditions. For this reason, business leaders should continuously educate themselves on creating and executing an effective strategy.
One of the best ways to stay up-to-date on best practices is to take an online course, such as HBS Online's Business Strategy program. The course will provide guidance on creating a value-driven strategy for your business.
Do you want to learn how to craft an effective business strategy and create value for your company's stakeholders? Explore our online course Business Strategy, or other strategy courses, to develop your strategic planning skills. To determine which strategy course is right for you, download our free flowchart.