Many firms develop business strategies. Some are effective, some are less so. Leaving aside the issue of quality of execution, what distinguishes an effective strategy from an ineffective one?
Competitive strategy is about creating a deliberate plan of action that will create a competitive advantage, and compound it over time. Effective strategies are borne out of a deep understanding of the competitive environment in which a firm is operating, including its industry and market structure, its competitors, products and services, threats and opportunities, and internal strengths and weaknesses. Great strategies also have the following four distinguishing characteristics:
- The strategy identifies the markets in which it can work. Many strategies fail because there is an insufficient number of customer who find the value being offered under the strategy meaningful.No matter how good the strategy on paper, if it cannot create a sufficient mass of customers, it will ultimately fail.
- The strategy is differentiated from competitors’ strategies. Great strategies define distinctive ways to play in the market that cannot be easily copied or replicated by competitors.
- The strategy is supported by capabilities. Capabilities are the bundles of processes, skills, competencies, tools and organization that give a strategy its legs. Distinctive capabilities make great strategies.
- The strategy considers risk. Every strategy involves risk – strategies are not immune to changes in the economy, competitive landscape, technologies, etc. Great strategies consider the inherent risks, explore “what if” scenarios, and include contingencies in case things change.
Finally, execution is, of course, critical. No matter how great a strategy, if it cannot be successfully executed, it is worthless!