The five components of a business strategy

Can you define exactly what a business strategy consists of? Some people say no, but we think you can.

In fact, we believe that a valid trading strategy has five components:

1. Your company’s current or desired core competencies
2. A description of how you will differentiate vs. competitors
3. The industry or industries in which you intend to compete
4. The initiatives you plan to implement in the areas of marketing, operations, information technology, finance, and organizational development
5. A financial forecast showing how your plans will meet stakeholder requirements over the next 3-5 years

Let’s look at each of these components..

The first component of a valid business strategy is a clear description of your company’s current or desired core competencies.

You may be thinking, “Great, but what is a ‘core competency’?” While there are many definitions, here’s a good one from Wikipedia:

“A core competency is something a company can do well that meets the following three conditions:

• Provide benefits to the consumer
• It is not easy for competitors to imitate
• It can be widely leveraged for many products and markets.

A core competency can take various forms, including subject matter/technical knowledge, a reliable process, and/or close relationships with customers and suppliers. It can also include product development or culture, such as employee dedication.”

For example, we might say that Southwest Airlines is a reliable airline that offers low fares. But to provide those benefits, you must have certain “core competencies,” important capabilities that allow you to have low rates and be reliable. We believe that Southwest Airlines has four core competencies that it executes so well that it regularly outperforms all other US airlines in terms of profitability.

These core competencies are:

• Lowest operating costs per aircraft
• An economic network of point-to-point airports
• A fanatical culture focused on customer service and cost savings
• The ability to keep planes in the air longer than their competitors.

Southwest Airlines couldn’t offer the benefits of low prices and reliable service without mastering these core competencies. What key benefits do you want to offer your customers? What core competencies do you need to master to provide them?

The second component of a valid business strategy is a description of how it differs vs. competitors.

In our experience, differentiation is about being the best at something. This should be summed up in your mission statement: what are your company’s aspirations and how are you going to beat the competition? We just talked about how Southwest Airlines differentiates itself: what will you offer customers that will make them choose your products or services so you can grow your business?

It takes a lot of hard work to find a great answer to this question and even more work to make that differentiation real. It’s easy for us to say that Southwest is the best low-cost airline in the US, but it’s extraordinarily difficult for them to do so.

The third component of a valid business strategy is a description of the industry or industries in which you intend to compete.

You should be able to define what type of company you are: are you a furniture manufacturer? A gift card retailer? A consultant, a bearing distributor, a toy importer, etc.? This step sounds easy, but we’ve found that companies are often so concerned with being too narrow in their focus that they can’t really get clear on what they want to do. A company with a good business strategy will have thought about these issues and made the difficult decisions necessary to clarify its identity. If so, you can easily pass the litmus test of identifying the industry or industries in which you operate.

The fourth component of a business strategy is the set of initiatives you plan to implement in the areas of marketing, operations, information technology, finance, and organizational development.

These are the plans that guide your company’s focus and resource allocation for years to come. If your business strategy is specific enough to be relevant, you will have detailed plans in all of these areas.

The fifth component of a business strategy is a financial plan that forecasts the results you expect to get from your plans and illustrates how they will meet stakeholder requirements over the next 3-5 years.

Your strategic planning process cannot be separated from your annual budget process. In the vast majority of companies, if it’s not in the budget, it doesn’t exist. That’s why you should have a senior financial person on your strategic planning team, preferably the CFO. During the planning process, your team should compile a financial plan that estimates the results of implementing your strategy. This plan must obtain the approval of your company’s management and board of directors and must be reviewed periodically to track results and make improvements.

So those are the five components of a valid trading strategy. Good luck in planning your success. And succeed because you plan.