Business Strategy Made Usable – Part I

People who study and teach about ideas such as strategy do not always help increase understanding or usefulness.  Virtually every textbook in the field has its own definition, or uses one that is so exotic – but academically precise – that it is not useful at work.  Even a common first starting point for most people seeking to understand business strategy generates more confusion than insight.

So, in this two-part post, let me help make this concept useful and relevant by sharing a simple way to understand and apply it.  I guarantee that it will take less than a minute to understand, and it will work.  

The first part needs to establish a critical point of understanding and then provide a few definitions.  The second post will explain the business strategy concept as it's used in practice, and how you can use it in your business.

Here's the critical point of understanding: when most managers talk about strategy, they mean "business strategy".  This is how a company beats a rival through competition that takes place within a single industry.  It's the type of strategy that most managers care about because it's the one that leads most conclusively to results.  And it's the one I'll discuss in the next post.

What is an industry?  Again, there are many definitions, but here's one you can use right away.  Think of an industry as the collection of companies that a customer decides he or she could hire to solve a particular problem.  

For instance, if I need to call a friend in Vancouver, or in Lagos – I could use long distance service provided by Bell Canada, and be prepared to pay a fee for what is likely a good quality line.  Or, I could use Skype, for free, but settle for a call that might be less than perfect.  So Bell Canada and Skype are competitors, even though stock market analysts might classify Bell as a "phone company" and Skype as a "software company".  That's why defining an industry from the customer perspective is so important – it brings the world that the company under study experiences to bear on deciding its direction.

There are two other types of strategy that managers need to understand.  One type is called "corporate strategy".  This is, essentially, how a company decides which industries to enter.  Most companies in the world seem to have a simple corporate strategy – stick in one industry.  In this way their corporate strategy is irrelevant to their business strategy.  Those companies that compete in two or more industries usually select industries that are somehow related, or at least where the expertise needed to compete in multiple industries draws on the same set of skills. 

Let's stick with Bell Canada and Skype.  Bell competes in local telephony, long distance telephony, mobile telephony, internet service, and the distribution of TV signals.  Each could be considered a separate industry.  But each draws down on core skills, such as network management, plus assets that it owns, such as a deployed network infrastructure and significant retail presence. Moreover, the sale of one service creates the basis of selling another.  Bell's corporate strategy is to tie together networked businesses, and, more recently, attempt to secure content.

Skype, on the other hand, uses a "freemium" business model, and sells only computer-to-telephone voice connectivity (SkypeOut).  Its free service, Skype, is there to attract customers. 

In corporate strategy terms, Bell is diversified, has chosen to do so by picking related industries.  Skype competes within a single industry.

The final type of strategy is called "functional strategy".  This is the type of strategy that a particular department of a company uses to support the company's business strategy and, occasionally, its corporate strategy.  I don't know much about functional strategy, and it's better handled by experts in finance, marketing and IT anyway. 

The concluding idea in this post is vitally important, and answers a vexing question in business: how is strategy implemented?  Here the answer is true for corporate, business and functional strategies:  all are implemented through the allocation of company resources.  Allocation means channeling resources toward intended goals, through uses.  Budgets and project selection are key tools in resource allocation.

But what are resources?  All organizations in the world – companies, governments, not-for-profits, clubs, religions, and everything else – are composed of only three resources . I categorize them simply as:

Money – this includes things such as brands, intellectual property, licenses, machinery, permissions, databases, and the like.  "Money" can also include cash and cash equivalents.  In general, money means all non-human assets that an organization owns.  (It's just a short form.)

People – instead of head count, think of skills. Why should you think this way?  Because customers don't hire your headcount, they hire what your headcount can do, enabled by your money.  Want a great 2012 business improvement project?  Answer this question: what skills work for you? 

Time – the duration, choices, and sequencing of projects to which you apply the money and people you have.  This is managerial judgment in action.

In practice, this means you can identify a organization's strategy perfectly by examining its allocation of resources.  Resource allocation – not an organization's claims about its priorities – reveal its true strategy.

So – this post has set the stage for understanding business strategy by

  • defining and distinguishing between business, corporate and functional strategies;
  • defining an industry from a real-world (i.e., customer) perspective;
  • identifying and explaining the three kinds of resources that every organization possesses; and
  • explaining strategy implementation as a process of resource allocation.

Next post…a working definition of business strategy, that you can use immediately, and that you can teach to others.




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