What is Strategy?
by Gerald Taylor MBA
I want to take the time today to talk about the meaning of strategy. As professionals we have heard of strategy as being:
- A statement of vision, mission, values and set of related objectives.
- A road map to the future.
- A high level plan to achieve long-term goals.
- A statement, in the broadest terms, of how you will achieve your goal or mission.
- The general approach and framework necessary to bring your vision to life.
- A unique set of activities to boost value creation, and landing the vision and objectives in actions.
I could go on, but I think you get the picture. Because the term strategy means so many different things in the minds of so many different professionals, the method of planning and executing strategy varies from organization to organization. Some organizations believe a strategy can be formulated by going offsite for 3 days, hiring a consultant to facilitate successive discussions and “BANG!”; the company has a strategy! While others go through painstaking studies of their markets, competition and internal competencies (in-competencies) in order to determine what is important to accomplish. Either way, the most recent studies of strategy success stories have revealed that almost 70 – 80 percent of implemented strategies fail to realize what their organizations hope to accomplish.
Over the next few weeks, I will be writing a series of Knowledgespace articles with the purpose of defining strategy, emphasizing the importance of strategic management and discussing strategy best practices for the 21st century. I hope you will benefit from these writings and they enable you to take the organization(s) you support to the next level.
Strategy Defined – From where did strategy come?
Historically, strategy is a term used to describe a general’s plan for deploying his forces with the goal of defeating an enemy army. The actual term of strategy is derived from the Byzantine (Greek) word strategos , which means “general.” Fast forward – the modern Greek equivalent for the word strategy is “strategike episteme” which means a general’s knowledge or “strategos sophia” which means a general’s wisdom. Perhaps the military leader with the greatest impact on strategy, Prussian General Carl von Clausewitz (1780 – 1831), who in his work entitled On War described strategy best as being concerned with: drafting a plan of war and shaping individual campaigns, and within these, deciding on the individual engagements.
So why are we discussing war and what do military campaigns have to do with business? War and business have much in common. I will beg your pardon to draw this association in the following parallel:
- The object of war: in the context of warring states, strategy is the employment of specific instruments of power (political/diplomatic, economic, military and informational) to achieve the political objectives of the state. In other words, strategy is the “application of power” inherent in the natural and societal resources of the state toward policy ends in an emerging, dynamic and competitive strategic environment. Thus, the object of military strategy is to use the assets of the nation in a powerful and aggressive fashion to achieve peace on its own terms.
- The object of business: in the context of modern business, strategy is the employment of specific resources (human, financial, technological and organizational) to achieve the economic profit objective of the corporation. In the same vein, strategy is the “application of power” inherent in the organized resources of the corporation in a changing and competitive strategic environment. Whereas the object of military strategy is to establish peace on the terms of the victor, the organizing principle of business is to satisfy the economic profit motive of its stakeholders.
Strategy Concept #1 – Economic Profit
“I know of the profit motive and understand my purpose as a corporate decision maker is to ensure that my company’s efforts result in the favorable circumstance where its revenues exceed its cost of doing business, but I am somewhat unfamiliar with the term – economic profit!”
Economic profit is a key metric of a business’s success. It is the key performance indicator of whether a business is creating wealth for its stakeholders and, in the final analysis, it determines if a company’s strategy is well planned and executed. The profession of economics treats normal accounting profit as a cost, so when deducted from total profit, what remains is either economic profit or an economic loss. To illustrate this concept, I will use an adaptation of example provided by investopedia:
Let’s say you invest $200,000 to start a business, and in that year you earn $220,000 in profits. Your accounting profit (ROI) would be $20,000. However, say that same year you could have earned an income of $50,000 (opportunity cost) had you been employed. Therefore, you have suffered an economic loss of $30,000 (220,000 – 200,000 – 50,000).
The lesson learned here is that you must be sure that the potential profit earned from the coffee shop covers the opportunity cost of drawing a salary. In this case, you would have been certain to create wealth had you earned an accounting profit of more than $250,000.00.
How does a Company Create Wealth?
The answer to this question is shown in figure 1 below.
The figure illustrates a company’s natural advantages that, when exploited by its strategy, can create distinctive competences to serve it well in its industry. Within the area of customer and market knowledge, the company has the natural advantage of a lower cost attractive product, a relatively captive market, and an infrastructure to reach a growing customer base. The company also enjoys superior efficiencies in working capital and a favorable pricing structure to meet short-term and long-term customer expectations. Operationally the company is very productive due to its lower labor cost and superior quality in its value chain. This advantage may explain the company’s exceptional working capital position. The company also benefits from its use of technology, the competence of its workforce and the effective use of its suppliers and partners. Collectively these benefits are consequences of an effective strategy implemented and executed over time. They create a situation where the profits earned exceed the required return needed to create wealth. And this is why I am writing the coming series of articles about how a company successfully develops and exploits distinctive competencies like these to realize the incredible benefits.
So…..What is Strategy?
In this and coming articles we will refer to strategy as:
- The intelligent and thoughtful formulation of how a firm’s resources will be used in order to achieve its economic profit objective.
- A series of systematic decisions and actions used to link the here and now with an executive team’s vision of the future.
In our next article we will discuss, The Modern Executives Strategic Responsibilities and 21st Century Strategy Best Practices. I welcome any comments or discussions you may have!Gerald Taylor is the Managing Director of The Performance Management Group LLC