Business strategic planning refers to the process of choosing and then implementing one of the two traditional business strategies. These two strategies go by different names, but you can think of one as the cost strategy and the other as the differentiation strategy.
If you select a cost strategy, you work to reduce your operating costs. Some of these cost saving savings you pass along to your customers or clients as a way to make your products or services more attractive than your competitors’. But the rest of the cost savings you keep as extra profit. And as Wal-Mart shows, the cost strategy can be wildly profitable.
If you select a differentiation strategy, you work to differentiate your product or service. You incur costs to differentiate of course. But the fact that your product or service is different from what other competitors provide—better, unique, more specialized, or whatever—makes your products or services more attractive to certain customers than the products or services of your competitors. You do charge your customers more for your differentiation. In fact, you need to charge customers more for the differentiation than the differentiation costs. But again, the strategy can be very successful. In retailing, for example, Nordstrom uses a differentiation strategy.
Several points should be made about business strategic planning:
- Business strategy planning simply means figuring out which strategy is most likely to make your firm successful. The planning starts, therefore, with an analysis of your firm’s strengths and weaknesses and with an analysis of your competitors’ strengths and weaknesses. This analysis leads to a decision to choose one of the traditional strategies—the one that will clearly make your firm’s products or services more attractive to certain customers. The planning process also needs to identify the specific tactics that your business will use to execute its strategy. For example, if your market analysis shows that you’re a low-cost provider, you might choose the cost strategy. And then to follow up, you would also identify the tactics you can use to win new customers away from your competitors on the basis of cost.
- There is a non-strategy that usually kills businesses in competitive industries. It’s the non-strategy of trying to be all things to all people. When you try that, you lose customers who shop on the basis of price to competitors who use a cost strategy. Similarly, you lose customers who shop for differentiated products to your competitors who use the differentiation strategy.
- If you’re very clever, however, you can sometimes combine the cost strategy and the differentiation strategy to create a hybrid, or customer, strategy. A customer strategy gives you a competitive advantage when targeting certain groups of customers who want a combination of cost savings and product differentiation. You see hybrid strategies work in some industries like retailing. If a particular group of customers wants some inexpensive items and some differentiated items, you can win some customers from a cost-strategy competitor and some customers from a differentiation-strategy competitor by cleverly combining these strategies. I would say that the large retailer, Target, does this. Target may not, for example, offer you prices as good as Wal-Mart. And Target may not offer you merchandise that’s as differentiated as, say, Nordstrom. But Target probably offers certain suburban middle-class shoppers a better collection of cost savings and differentiated products. The trick with a hybrid strategy, obviously, is customer knowledge.
- The previous point about hybrid “customer” strategies raises a relevant point. People who successfully execute a cost strategy are experts at managing costs. People who successfully execute a differentiation strategy are product or service experts. Finally, people who successfully execute a customer strategy are customer experts. Another way to explain their success in a market is that they’re simply being rewarded for their expertise.
- Some research indicates that new businesses are more likely to succeed with a high-end product or service (rather than with a low-end, low cost product or service.) This makes sense if you think about. It’s often easier to differentiate yourself if you’re new or small simply because you are new or small. But in many industries, it’s relatively difficult to run a super-low-cost operation simply because you won’t enjoy any economies of scale.
I do assist clients with business strategy planning. In general, the assistance comes in the form of on-going planning for established clients with whom I have a close advisory relationship.
Let me also say that if you’re interested in the details of how the business strategic planning process works, you might want to read Michael Porter’s book, Competitive Advantage. Porter, a Harvard Business School professor, is the father of business strategic planning. And his book, while rather dry, supplies a goldmine of business strategic planning information.