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Company business strategy explains how a firm

differentiates itself from competitors, how it generates

revenues, and where it earns margins.

Contents

Page TopContents

How Do You Know the Strategy Serves its Purpose?

Customer demand Sales revenues Repeat business volume

Business volume. Customer retention rate. Accessible market size

Average sale value RFP's received. RFP quality and size

Market share Market position Competitive win rate

Growth rate vs. competitors Margins vs. competitors Leading brand awareness

Gross profits Gross margin Operating profits

Operating margin EBIT and EBITDA Return on total assets (ROA)

How Do You Formulate a Strategy?

Five Steps to a Generic Business Strategy

Page TopContents

Strategy Building Step 1

Build on the Vision

Page TopContents

Strategy Building Step 2

Focus on Top Level Objectives

Page TopContents

Strategy Building Step 3

Plan Your Attack and Choose Your Battlefield

Strategy Building Step 4

Reality Check: Does the Model Stand?

Home > Encyclopedia > B > Business Strategy

Formulate a Winning Business Strategy, Model,Formulate a Winning Business Strategy, Model,

Strategic FrameworkStrategic Framework

How to Develop Business Strategy and Measure Strategic Impact in 5How to Develop Business Strategy and Measure Strategic Impact in 5

stepssteps

Business Encyclopedia ISBN 978-1929500109 © 2020 Solution Matrix Ltd All Rights Reserved

What is Business Strategy?

In competitive

industries, each firm

formulates a strategy it

believes it can exploit.

Textbooks sometimes

define business strategy

simply as a firm's high-

level plan for reaching

specific business

objectives. Strategic

plans succeed when they

lead to business growth,

a strong competitive

position, and strong

financial performance.

When the high-level strategy fails, however, the firm must either change its

approach or prepare to go out of business.

The brief definition above is accurate but, for practical help, many businesspeople

prefer instead a slightly longer version:

Business strategy is the firm's working plan for achieving its vision,

prioritizing objectives, competing successfully, and optimizing

financial performance with its business model.

The choice of objectives is the heart of the strategy, but a complete approach also

describes concretely how the firm plans to meet these objectives. As a result, the

strategy explains in practical terms how the firm differentiates itself from

competitors, how it earns revenues, and where it earns margins.

Strategies Reflect the Firm's Strengths, Vulnerabilities, Resources,

and Opportunities. And, They also Reflect the Firm's Competitors and

Its Market.

Many different strategies and business models are possible, even for companies in

the same industry selling similar products or services. Southwest Airlines (in the

US) and Ryan Air (in Europe), for instance, have strategies based on providing low-

cost transportation. The approach for Singapore Airlines focuses instead on brand

image for luxury and quality service. In competitive industries, each firm

formulates a strategy it believes it can exploit.

Formulating Strategy Is All About Meeting Objectives (Goals)

In business, the strategy begins with a focus on the highest level objective in private

industry: Increasing owner value. For most companies that is the firm's reason for

being. In practical terms, however, firms achieve this objective only by earning

profits. For most firms, therefore, the highest goal can be stated by referring to

"profits." The generic business strategy, therefore, aims first to earn, sustain, and

grow profits.

An Abundance of Strategies

Strategy discussions are sometimes confusing because most firms have many

strategies, not just a single "business strategy." Analysts sometimes say marketing

strategy when they mean the firm's competitive strategy. And, a firm's financial

strategy is something different from its pricing strategy, or operational strategy.

The firm's many strategic plans interact, but they have different objectives and

different action plans.

The Strategic Framework

The subject business strategy is easier to understand—to make coherent—by

viewing each one as part of a strategic framework.

The strategic framework is a hierarchy. At the top sits the firm's overall (or generic)

business strategy. Here, the aim is the highest-level business objective: earn,

sustain, and grow profits. Some may immediately ask: Exactly how does the firm

achieve it's profit objectives?

Firms in competitive industries answer the "how" question by explaining how the

firm competes. For these firms, therefore, the overall business strategy is rightly

called a competitive strategy. A "competitive strategy" explains in general terms

how the firm differentiates itself from the competition, defines its market, and

creates customer demand.

However, detailed and concrete answers to the "how" question lie in lower level

strategies, such as the marketing strategy, operational strategy, or financial strategy,

The marketing strategy, for instance, might aim to "Achieve leading market share."

Or, "Establish leading brand awareness." Financial strategy objectives might

include: "Maintain sufficient working capital" or "Create a high-leverage capital

structure."

Understanding the Strategic Framework

Indeed, most firms develop and use a rich and complex strategic framework. As a

result, business strategy formulations are more explicit when they focus on these

points:

Specific business objectives for each strategy. Identifying which goals in theframework have priority over others.

Mapping relationships between the various strategies. Showing, for example,which of them support others.

This article, therefore, presents business strategies as components of a strategic

framework.

Explaining Business Strategy in Context

Sections below further explain and illustrate business strategy in the context of

related terms and concepts. This article

Presents and compares working definitions for business strategy, genericstrategy, competitive strategy, top-level strategy, and strategic objective.

Explains why firms sometimes change strategies and how to measure changeimpact with selective income metrics such as EBIT and EBITDA.

Shows how to formulate the top-level competitive strategy in five steps, startingwith the founder's vision and building into a complete strategic framework.

Illustrates the quantitative business model role in validating a strategy proposal.

What

is a business strategy?

Purpose of the Strategy: How do you know the strategy serves its purpose

Strategy and the meaning of success.

How do firms know when to change strategies?

How do they know if the new plan succeeds?

How do you formulate a business strategy? Formulating a general businessstrategy in five steps.

Firstly, build on the vision.

Secondly, focus on the most critical objectives.

Thirdly, plan the attack, choose the battlefield.

Fourthly, take a reality check: Does the business model stand?

Fifthly, build a support structure: The strategic framework.

Related Topics

Brand, the branding process, and branding strategies: See Branding.

Pricing, pricing objectives, and pricing strategies: See Pricing.

Company profitability metrics. See Profitability.

Capital and financial structures. See Capital Structure, Financial Structure, andLeverage.

Strategies and the Meaning of Success

Business strategies

succeed when they lead

to business growth, strong

competitive position, and

strong financial

performance. Many

different approaches are

possible, but all are meant

to bring improvements in

these areas.

In highly competitive

industries, the firm's

officers and other senior

managers take a keen

interest in knowing precisely how well their strategies succeed in serving this

purpose. Interest is especially keen immediately after the company changes or

adjusts plans.

Dominos Pizza Changes Strategies. Was the New Strategy

Successful?

In 2009, for instance, managers and owners of Domino's Pizza, Inc. were

distressed because the firm had just had three years of negative sales growth and

shrinking market share. The firm was, in particular, losing market share to two

significant competitors, Papa John's and Pizza Hut.

Domino's operates in the "Quick Service Restaurant" (QSR) industry. Many people

call this industry, unkindly, the "Fast Food" business. The firm competes not only

with other Pizza restaurants, but also with restaurants with different menus such as

Subway, McDonald's, and Chick-Fil-A. This segment of the Restaurant industry

defines itself not by menus, but instead by the words "Fast" and "Quick."

Understandably, therefore, Domino's started with a strategy based on "Quick

Service Delivery." The firm excels in fast delivery, a point that separates Domino's

from its competitors. Nevertheless, in 2009, the strategy seemed to be failing.

In late 2009, therefore, the firm's new CEO chose to "re-center" strategy on pizza

quality. Market research showed that customers rated Domino's pizza taste as very

poor ("like cardboard"). As a result, by the end of 2009, the firm had substantially

improved the pizza recipe and launched a marketing program to bring this news to

the market. The question on January 1, 2010, was: Will the new strategy work?

The Results Are "In." Strategy Change Succedes.

Anxious for an answer, the firm began in Q4 2009 detailed tracking of the growth,

competitive, and financial metrics that appear in the next section. By the end of Q1

2010, the first results were "in." The measures in all three categories showed

remarkable improvement. Domino's took this as confirmation the new strategy was

succeeding.

Now in 2018, the firm continues to research and improve the pizza recipe, while

adjusting its marketing strategy at the same time. For this, the firm relies on its 8-

year tracking history with these metrics.

Measuring Success With Strategies

A new strategy or a strategic change is successful when the strategic plan itself is

undoubtedly responsible for one or more of the following measurable, tangible

results:

Firstly, Business Growth. Growth Means Increasing:

Secondly, Strong Competitive Position, Which Means Increasing:

Thirdly, Strong Financial Performance, Which Means Increasing:

Measure Strategic Impact Precisely

Notice that analysts measure the impact on financial performance with metrics that

focus on the firm's core line of business.

Domino's, for instance, prefers to measure strategic impact with EBITDA—Earnings

before interest, taxes, depreciation, and amortization. Domino's tracks EBITDA

because EBITDA and other selective income metrics measure strategic effects more

precisely than overall Net Income After Taxes.

The firm's strategy drives performance in the core line of business, after all, and

that is what strategic planners need to measure. "Bottom line" Net income,

however, also reflects factors other than core strategy: (1) revenues and expenses

from outside the core business, (2) accounting conventions such as depreciation,

and (3) taxes. These factors tend to "muddy the waters" when the analyst tries to use

Net Income to measure the impact of strategy changes.

Business strategy is the firm's working plan for achieving its vision, prioritizing

objectives, competing successfully, and optimizing financial performance with its

business model.

Strategy builders can find practical guidance in this definition. Notice that the

definition names four kinds of actions. With just a little imagination you can

probably see that these actions point rather directly to steps in a strategy building

process:

Exhibit 1. Formulating a generic competitive strategy in five steps.

This strategy building process is rational, straightforward, and likely to succeed—if

the strategy builder takes these steps in order.

Note that businesspeople rightly speak of strategy building as strategy formulation,

instead of "writing a strategy." The verb formulate suggests a building process that

is orderly or systematic and results that are definitive and precise.

Successful strategies build

on the founder's vision for

the business. For some

firms, the founders write a

formal vision statement.

Others list the core ideas

that give the business

substance, shape, and

direction.Either way, the

vision pictures the

essential nature of the

business: what it looks like

and what it does.

Strategy formulation Step

1 lays a foundation for the

strategy. Here, the strategy builder re-states several ideas from the founder's vision

for the business.

Offerings and value proposition.

Industry.

Customers and market.

The Firm's Offering and Value PropositionThe Firm's Offering and Value Proposition

The business strategy builds directly on the firm's offerings and its value

proposition. This proposition describes the goods and services the firm

sells, regarding the value they offer to the customer.

For instance, Dell began in 1984 with a value proposition that was unique atthe time. Dell promised to build a computer when a customer orders, exactlyas the customer wants it, and deliver it at a very competitive price.

For example, Boeing states the customer value proposition for its 747-8 aircraftvery briefly: "...more range, better fuel efficiency, and lower operating costs."

In brief, the value proposition explains why customers would buy from this

firm instead of the competition. In this way, the value proposition shows how the

firm creates customer demand and differentiates itself from competitors.

The Firm's Industry.

Naming the firm's industry sector help's identify the firm's competitors. And from

that, the strategy builder learns which strategies the firm must compete against in

the marketplace. The strategy builder's task is to understand which approaches

work well in the industry and which do not.

For example, Domino's Pizza operates in the Quick Service Restaurant industry.

That means its competitors are restaurants of various kinds that:

Firstly, deliver orders very quickly after ordering.

Secondly, price moderately.

Thirdly, provide a "family friendly" setting.

When Domino's changed strategies in 2009, it did so after reviewing the

approaches of its competitors, Papa John's, Pizza Hut, Subway, Chick-Fil-A,

McDonald's, and others.

Note that a single firm can operate in several industries. Apple, for instance,

operates in at least five industry sectors: Computer hardware, Computer software,

Consumer electronics, Digital distribution, and Silicon Design. Apple faces a

different set of competitors in each of these industries.

There are, incidentally, quite a few industry classification schemes, or taxonomies,

in use, worldwide. However, for strategy builders, all that matters is that the firm

refers to a system that identifies the firm's competitors accurately.

The Firm's Customers and Market

Identify first the firm's customers as either consumers or businesses. This distinction

is essential for strategy builders because consumers and business firms buy for

different reasons. They have different criteria for deciding what and when to

purchase. And, they respond differently to seller pricing strategies.

Identify also the target market for the firm's offerings and value proposition. Note

that markets can have quite a few defining characteristics.

When customers are consumers, marketers define the market with factors suchas gender, age, occupation, economic status, work experience, education,geographic location, or special interests.

If, however, the firm sells to other businesses ("business-to-business," or B2B), itmay define its market by factors such as customer industry, customer businessmodel, or manner of selling.

Businesspeople sometimes

ask: What is the purpose

of the strategy? The

answer has to name a

business objective. The

strategy's reason for being

is to explain how the firm

achieves specific goals.

Strategy formulation

continues in Step 2 by

naming tangible top-level

of business objectives and

explaining how to measure

progress towards meeting

them.

The generic business strategy explicitly addresses the firm's most important goals.

As a result, Strategy formulation Step 2 is a matter of specifying the firm's highest

level objectives.

Top Level Objectives in Private Industry

For firms in private industry, the highest level objective is increasing owner value.

For most businesses that is the firm's reason for being. Note, however, that firms

achieve this objective only by earning profits. And, there are only two ways they

can use the period's profits to increase owner value:

Firstly by distributing some or all profits directly to shareholder owners asdividends.

Secondly, by keeping some or all profits as retained earnings, thereby buildingowners equity on the Balance Sheet.

Because firms increase owner value primarily by earning profits, the supreme goal

itself reduces to a profit statement: The firm's primary objective is to make, sustain,

and grow profits. From this, it follows that a private firm's general business strategy

is explicitly designed to enable the business to create, continue, and increase

profits. Top Level Objectives in Government or Non-Profit Organizations

Most government and non-profit organizations, of course, do not exist to meet

profit objectives. A few—such as Postal Services, licensing agencies, or lottery

commissions—do generate revenues and try to earn enough to cover their

expenses. However, for these and all other government and non-profit firms,

critical strategic objectives derive from mission statements.

Example: Top Level Objectives for Government Department

For instance, the Department of Transportation in the US State of Oregon (ODOT)

has the following mission statement:

ODOT Mission: To provide a safe, efficient transportation system that

supports economic opportunity and livable communities for

Oregonians.

From this, ODOT derives five critical strategic objectives: (1) Safety, (2) Mobility, (3)

Preservation, (4) Sustainability, and (5) Stewardship. ODOT further explains the

meaning of each objective in concrete terms. And, it provides tangible

performance measures for each goal, which are useful for developing the

Department's strategy. In this way, performance measures also help set targets, plan

budgets, and evaluate Department performance.

Mission Statements and Values in Private Industry.

Some businesspeople are not pleased when they think they have just heard that

their firm's "only" objective is "earning profits." They are displeased because many

firms have mission statements, value statements, and creeds that point to still

higher objectives. People understandably ask whether strategy builders should

place these objectives on the same high-level as the profit objective.

Example: high-level Values at Johnson & Johnson.

Consider, for instance, the credo for Johnson & Johnson, a producer of medical

devices, pharmaceuticals, and packaged goods. The J&J credo presents four

responsibilities:

"Our first responsibility is to the doctors, nurses, and patients, to mothers andfathers and all others who use our products and services."

"Secondly, we are responsible to our employees, the men, and the women whowork with us throughout the world.

Thirdly, we are responsible to the communities in which we live and work andto the world community as well.

Our final responsibility is to our stockholders.

The firm takes these responsibilities seriously. J&J displays the credo prominently in

corporate buildings and on corporate grounds. And they emphasize these values in

communications and reports. J&J describes them as "values that guide our decision-

making." As a result, the firm tracks its success in meeting these responsibilities

with surveys and performance indicators.

Are Important Values Strategic Objectives?

Their importance notwithstanding, high-level mission statements and values like

these are not part of the firm's generic business strategy. They do not use these

values to differentiate themselves from competitors. For that, J&J relies on a "Broad

differentiation" strategy to distinguish itself from competitors and create customer

demand. The set of values, on the other hand, help shape the ways the firm designs

and implements lower-level strategies, such as its marketing strategy or its

operational strategy,

For firms in competitive

industries, the high-level

generic strategy is

necessarily a competitive

strategy. In most cases, the

selected approach results

from two choices. The

strategy builder must

choose:

Firstly, a plan ofattack, which is thegeneral approach fordifferentiating the firmand its offerings fromthe competition.

Secondly, thebattlefield, which is the specific market and market focus where competitiontakes place.

Strategy formulation Step 3 addresses the "How" question: Exactly how does the

company achieve objectives? For firms in competitive industries, the question

becomes this: Specifically, how does the company win against competitors, create

customer demand, and earn, sustain, and grow profits? For these firms, the generic

business strategy is a competitive strategy.

Plan the Attack

For many decades, textbooks and business articles have put forward the idea that

strategic planners have essentially only two possible plans of attack: Firstly,

differentiation and secondly, cost leadership.

Firstly, They May Choose Differentiation:Firstly, They May Choose Differentiation:

Here, the firm provides uniquely desirable products and services. Firms that choose

a differentiation strategy to create and communicate uniqueness through one or

more of the following::

Creating new products or services.

Adding unique features or capabilities to existing products

Achieving brand strength, communicating desirability, exclusiveness, superiordesign, or high quality.

Pricing to undersell the competition.

Secondly, They May Choose Cost LeadershipSecondly, They May Choose Cost Leadership:

Firms that pursue cost leadership goals minimize their production and selling costs.

Companies with a "cost leadership" strategy can charge industry average prices and

still earn handsome profits because their costs are lower than the competition.

However, firms using cost leadership may also add an element of differentiation by

selling at lower prices. Even so, they can still realize acceptable margins because

their costs are low.

Michael Porter's Generic Strategies

Discussions on business strategy usually refer to several ideas of Michael Porter.

These stem primarily from Porter's books, Competitive Strategy1 (1980) and

Competitive Advantage2 (1985). Porter's approach adds a second choice for

strategy builders: the scope of the attack against competitors.

Choose the Battlefield

Porter's system allows strategy builders to select between attack plans

"Differentiation" and "Cost leadership," but also to choose the level of market scope

for competitive activities. The strategy may target a broad market, or it may target a

narrowly focused market.

As a result, under Porter's system, the strategy builder chooses from four generic

competitive strategies. Exhibit 1 shows the possibilities.

Source of Competitive Differentiation

Cost Leadership Differentiation

MarketScope

Broad Cost Leadership Strategy Broad Differentiation Strategy

Focused Cost Focus Strategy Differentiation Focus Strategy

Exhibit 1. Michael Porter's Four Generic Competitive Strategies

Choosing the Best Strategy

In competitive industries, each firm chooses the strategy it believes it is best

prepared to exploit. Making that judgment, however, calls for excellent and

detailed knowledge in several different areas.

Firstly, the Strategy Builder Considers the Firm's Strengths,

Vulnerabilities, Resources, and Opportunities.

Strategy builders, in other words, need access to information about their firm—

some of which is public, and some of which is probably proprietary, or "inside"

information.

Areas of strength might include, for instance, the firm's capabilities in design,research, development, service delivery, or efficient production. Otheradvantages might involve an existing market presence, strong branding, oreffective sales and marketing.

Vulnerabilities might include specific weaknesses, inabilities, or ongoingproblems. The firm might be struggling with cash flow problems and a shortageof working capital. Or, it may operate with a high-leverage capital structure—making it vulnerable to business slowdowns or other changes in the economy.Or, the firm may be unable to bring new products to market quickly.

Resources might include, for example, existing production capacity and theinfrastructure to support it, or existing service delivery capabilities. Resourcesmight also include access to capital, or sufficient working capital for productresearch and development, marketing programs, or infrastructure upgrades.

The firm might see opportunities in the form of a failing competitor, or anexpanding market, or an idea for an entirely new product.

Secondly, the Strategy Builder Tries to Understand the Firm's

Competitors and Their Strategies.

The strategy builder identified the firm's industry in Step 1 (Build on the vision).

Naming the industry sector helps identify the firm's competitors.

Understanding the competition begins by identifying which competitors hold asignificant share in the firm's target markets.

It is essential to know which of these are gaining market share, losing marketshare, or merely holding market share.

From this, the strategy builder finds which strategies are working in this market, and

which are not.

Incidentally, firms cannot hide their generic strategies from competitors. One firm

can reasonably deduce the strategic plan of another from knowledge of the

competitor's product history, pricing history, and marketing messages.

Thirdly, the Strategy Builder Tries to Understand the Dynamics of the

Firm's Target Market and Its Customer Base.

In Step 1 (Build on the vision), the strategy builder also states the firm's offerings, its

value proposition, its target customers, and its target market.

The strategy builder will try to understand first the buying behavior of the firm'scustomers by understanding what defines "value" for these customers: Theymay shop for price, for the brand, or they may judge "value" by other criteria.

Understanding the dynamics of the target market will also be necessary forStep 5 (Reality check: Does the business model stand?). For this, the strategybuilder needs to know, especially, market size and market growth rate.

Strategy Exists When the Business Model Exists

Knowledge in the above areas may be considered the necessary "background" for

choosing and building a strategic plan. From this, strategy builders sense intuitively

which general strategy will serve the firm best. And they may at this point have

some sense of how the firm will differentiate itself and create customer demand.

This much, however, is not yet a strategy.

The strategy will be ready

to "go to market" only

after it validates with a

quantitative business

model.

Strategy formulation Step

4 completes the general

business strategy by

developing the business

model inherent in the

strategic plan. Here, the

challenge is to build a

quantitative model,

implied by the approach,

that is realistic and

credible.

The Model Serves As a "Reality Check" For the Generic Strategy.

For this, the strategy builder uses the background knowledge from Step 3 along

with realistic sales and cost assumptions to build a quantitative business model.

The resulting model shows whether or not a proposed strategy can bring desirable

sales revenues, margins, and profits.

The Model Also Serves As a Basis for the Firm's Business Plan

When the firm chooses to implement the strategy, the model becomes the

cornerstone of the firm's business plan. In that capacity, the model also supports

the forecasting of sales revenues, costs, margins, and profits.

Example: Two Firms, Two Strategies, Two Business Models

In its purest form, the business model looks like a very brief version of the firm's

Income statement. Like the Income statement, the model starts with sales revenues.

Estimated expenses are subtracted from these to create margins and profits—gross

profit, gross margin, operating profit before taxes, and operating profits and margin

after taxes.

Exhibit 2 shows two models, from two different firms, each with its generic strategy.

Figures are in $1,000s.

Exhibit 2. Business models for firms Alpha and Beta.

Each firm develops its model from its generic strategy

proposal. The models rely on sales and cost assumptions

they believe are reasonable.

Building the Quantitative Model

Before comparing the Alpha and Beta models, it will be helpful to discuss briefly

how the strategy builder creates the model from a strategy proposal and the Step 3

background information. The quantitative model with profits and margins develops

naturally when the strategy builder makes these estimates:

Firstly, target product revenues and target services revenues.

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Page TopContents

Page TopContents

Strategy Building Step 5

Build the Strategic Framework

Market size.

Accessible market % of total market

Alpha's market share.

Major competitor's market share.

Demand as a function of pricing.

Branding strength

By Marty Schmidt

Secondly, expenses necessary to earn target revenues in these expense areas:

Cost of Goods sold and Cost of services.

Selling expenses.

Administrative and general overhead expenses.

Forecasting Target Revenues for the Model

The strategy builder creates target revenue forecasts from knowledge of:

Market size and current sales of similar products and services in this market.The proposed strategy will either focus on a narrow market or a broad market.

The firm's likely market share and competitors' market share.

Market growth rate.

The firm's ability to differentiate itself from the competition under the possiblestrategy. Also, the firm's ability to benefit from strong branding under thestrategic plan. The firm will differentiate either by unique product attributes,branding or through low-cost pricing.

Forecasting Target Expenses for the Model

The strategy builder forecasts expense forecasts from knowledge of:

Target revenues and the firm's current Cost of goods sold or Cost of services.

The firm's current cost structure.

Cost structure changes under the proposed strategy.

Alpha's Strategy: Broad Differentiation

Firm alpha has chosen to propose a broad differentiation strategy. The firm intends

to differentiate itself primarily in these terms:

Strong branding emphasizing product quality, "cutting-edge" design, anddesirability. Branding efforts will communicate product qualities central to thefirm's value proposition.

Unique product features and capabilities. For these, Alpha intends to achievemarket penetration and market leadership by being "first to market."

With successful branding, moreover, Alpha believes it can charge premiumprices and still sell successfully in a vast market.

Alpha's model in Exhibit 2 shows the likely results of applying this strategy: Gross

margins for products and services are relatively high (37% and 30%, respectively).

However, Alpha's expenses for selling, administration, and overhead are also

relatively high. Therefore, despite the high gross margins, the overall after-tax net

(operating) profit margin is only 5.0%

Beta's Strategy: Cost Leadership in a Broad Market

Firm beta has chosen to propose a cost leadership strategy, targeting a broad

market. For this, Beta will differentiate itself from competitors by selling at prices

below industry averages. Success with the strategic plan depends on keeping

expenses low.

Applying this strategy, Beta forecasts lower gross margins than Alpha for products

and services (21% and 10%, respectively). Nevertheless, Beta's lower cost structure

still results in an overall after-tax net operating profit margin of 5.0%

Does the Model Stand?

Should either firm choose its proposal strategy? The answer depends on these

considerations.

Firstly, the model's credibility. The forecast margins are credible as long as therevenue and expense estimates are plausible. To enhance believability, themodel builders will probably provide:

Conservative revenue estimates—realistic, but lower than the firm's mostlikely revenue estimates.

Pessimistic expense estimates—realistic, but somewhat higher than thefirm's most likely cost estimates.

Secondly, the acceptability of the forecast profits and net profit margin.

Alpha, for instance, forecast net profits of $7,505,000 and a net profit margin of

5%. Because the general strategy objective is to increase owner value by earning,

sustaining, and growing profits, Alpha will have to decide whether these results are

"Excellent," "Just acceptable," or "Unacceptable." Here, Alpha will judge

acceptability by using model results to address other questions:

Are these profits and margins sustainable? Do they point to continued growth?

Do these profits support the firm's targets for retained earnings growth? Fordividend payments?

How do these profits impact profitability metrics and valuation metrics, such asearnings per share (EPS) and return on assets (ROA)?

Firms succeed partly

because their high-level

generic strategies are

successful. Generic plans

need support, however,

from quite a few lower

level strategies. Strategy

formulation Step 5

completes the strategic

framework that supports

the general strategic plan.

Success with the highest-

level strategy is due to the

underlying product strategy, branding strategy, and operational strategy, for

instance, to name just a few.

The Strategic Framework

Apple, Inc., is a highly successful company that makes the best of a highly

successful strategy. Industry analysts typically describe Apple's general strategic

plan as follows:

"Apple’s general approach is broad differentiation. This generic

strategy focuses on key features that differentiate the firm and its

products from competitors. Through the broad differentiation generic

strategy, Apple stands out in the market.

For example, emphasis on elegant design combined with user-

friendliness and high-end branding effectively differentiate the firm.

The broad differentiation generic strategy means that Apple always

aims to set itself apart from competitors not by price but by other vital

features beneficial to customers."

— Pauline Meyer, The Panmore Institute, 20173

Note that explaining exactly how Apple differentiates itself calls for a description of

Apple's product strategy and its branding strategy. Success with these strategies,

however, depends on the presence of successful plans for pricing, selling,

operations, product production, product distribution, and customer satisfaction.

Generic strategies succeed, in other words, because they sit at the top of a

complete strategic framework. The framework components are lower-level

strategies, their objectives, and their action plans. Note that individual strategic

plans impact each other for this reason: the goals for each strategy support also

objectives for different strategies.

Building the Framework: Focus on the Objectives.

Exhibit 3 shows the top two levels in one firm's strategic framework.

Exhibit 3. The first three lower-level strategies immediately under the higher-level

general strategic plan are, for many companies, (1) The marketing strategy, (2) the

operational strategy, and (3) the strategic financial plan.

The second-tier strategies cover the inventory of objectives that must be met, to

make the quantitative business model "work." These objectives were assumptions

for the model builder. For the strategy builder, they now become targets to achieve

with lower level strategies.

Example: Second-Tier Objectives and Strategies for Company Alpha

In its Exhibit 2 business model, for instance, Company Alpha forecast product

revenues of $100,000,000. To achieve $100 million in product revenues, however,

the model builder had to make quite a few assumptions.

Marketing and Sales Assumptions Become Target Objectives

To forecast sales revenues, Alpha made quantitative assumptions about the

following:

Calculations using these numbers lead to the forecast first-year sales revenues of

$100,000,000. As a result, Alpha's marketing strategy must plan and achieve the

assumed target values, by making each assumption an objective for the marketing

strategy.

It is clear at this point that reaching marketing strategy objectives, calls for another

tier of lower level strategies. Alpha will pursue the strategic marketing objectives

through its product strategy, branding strategy, and advertising strategy, for instance.

Operational and Financial Assumptions Become Target Objectives

To estimate revenue and expense figure estimates for the model, Alpha also had to

make quantitative assumptions about many of the factors in Exhibit 3 under

"Operational" and "Financial" strategies.

Alpha had to assume it will have sufficient working capital to pursue necessaryproduct research and development. Working capital is an objective for theFinancial Strategy,

Alpha also had to make assumptions about efficiency levels in productproduction, selling, and administration. These become objectives under"Operational Strategy," which are the targets of specific lower level strategiessuch as the selling strategy, or the inventory management strategy,

When is it Time to Change Strategies?

Quite a few firms started in business with competitive strategies that were initially

very successful, but which began to fail in the aftermath of changes such as the

following.

Competitors enter the market or bring new products to market

Technologies change.

Customer demand changes.

For firms that know where to look, strategies do give early warning when failure is

underway. The challenge is knowing what to change and how to change it. In most

cases, the road back to a successful strategy begins with adjustments to existing

lower level strategies—not a rejection of the entire top-level generic competitive

plan.

Changing Strategies at Research in Motion (Blackberry)

For example, the Canadian firm Research In Motion dominated the mobile

smartphone market for much of the first decade of the 21st century with its

Blackberry devices. RIM's successful strategy included unique product features,

excellent messaging performance, and security. Another focus of RIM's strategy

was its "Enterprise model." For this, the firm focused more on selling to corporate

buyers and less on marketing to end-user consumers.

Most businesspeople know well how quickly RIM's market share fell after Apple

introduced the iPhone in 2007. The fall continued as still other competitors entered

the smartphone market shortly afterward. For a few years, the RIM firm (now re-

named Blackberry) struggled to recover success with its existing product strategy

and the Enterprise model. Only much later did the firm fully embrace the idea of

changing strategic places. As of 2017, the firm is still struggling to find a new

generic competitive strategy that works.

Changing Strategies at Domino's Pizza

An example above describes the more successful strategic changes made at

Domino's Pizzha in 2009. At that time, management and shareholders were

worried because the firm had suffered three years of negative sales growth and

shrinking market share. Domino's operates in the "Quick Service Restaurant" (QSR)

industry—an industry segment defined not by restaurant menu, but instead by the

words "Fast" and "Quick." For this reason, the firm's strategy in 2009 focused

primarily on "Quick Service Delivery." However, even though the firm excels in fast

delivery, the strategy was failing.

At Domino's, it took the arrival of a new CEO to take action, quickly, and make

strategic changes. The story of the resulting success appears above. What is crucial

to emphasize was the nature of the change process. Domino's changed little about

its generic competitive strategy. More accurately, Domino's merely adjusted its

product strategy—refocusing marketing and branding emphasis to taste and quality

of the menu.

Lessons from Domino's and Blackberry

Both firms in the examples—Domino's and Blackberry—suffered several years of

declining market share before taking action to change or adjust the strategy. From

this experience, however, Domino's has learned the importance of paying close

attention to the extensive set of performance metrics appearing above in the

section Purpose of the Strategy.

A few these will give early warning—before the others—that one or more specific

components of the strategic framework are beginning to fail. At this point, before

the entire business fails, the firm may be able to reverse decline through carefully

monitored adjustments to these framework elements.

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