June 2001

A note on the Fundamentals and Principels of Business Strategy

Introduction

Strategy, a much used word in the world, politicians, government officials, the military and business people use it and often abuse it. The usage of the word strategy should give their statements an additional impact and make it look more serious.

Strategy is an important element in life and could deliver a better return on investments or policy for that matter only it is used all to often incorrectly. At least to our understanding of strategy.

Strategy is an element of a hierarchical system which can make the creation and the execution of decisions better, easier and more logical. The role of strategy is a really important one as it is the first or highest one which includes the first steps to the execution. And everything has in the end to be measured against the efficacy. A brilliant strategy without a proper excution is as valuable to a company as a car without an engine. It might look good but not really helpful in going from A tot B.

We will try to bring some understanding into the idea of strategy. We will describe strategy, place it in a system and give some principels how to use and execute it.

Strategy

The definition of strategy is that it is the calculation of relationships among means, end and will or as the management, allocation, of resources, in anticipation on developments, towards a goal. The strategy is therefore mostly dictated by the availability of means than by the nature of the ends. Strategy is about what and when to do what in general terms to reach your objectives or what has to be achieved.

The strategy level is the first, highest, level which has to turn an idea into a feasible plan. Strategy is at the cross roads between, in the case of a company, the owners, read share holders, and the actual management of the company.

Strategy is responsible for the masterplan, the direction in which the entity has to work. It should give a layout of the main direction, clear, understandable and acceptable to all parties. This would make the execution of the strategy very much likely and the most important succesful.

The exact policy/execution, who is doing what, when and how, is something to be worked out at lower levels. The close involvement of the lower levels is therefore necessary to promote the proper execution. The lower levels are in the end effect responsible for the execution and they know what is possible.

All levels in the entity should to achieve this communicate with eachother regularly and without the impediment of hierarchical barriers. The hierarchical system is just a formal system and should not limit the flow of information. Without proper communcation between all levels, independent islands could be created who will start to work according their own ideas without taking care of the big picture. As long as their little thing will look good and works correctly everything will be allright. But in this system the achievements and quality will deteriorate rather quickly as the responsibility will automatically be inflated. As if there is none accountability and method to measure the achievements everything which is reached will be looking good.

A proper strategy connected with a management system should guide the whole process and make it succesful. But it should be remembered that a good strategy alone is not enough as strategy as such is equal to al other levels as it is dependent on their functioning to be succesful or not.

The System of Strategy

Strategy is only one part in a kind of hierarchical system which forms the entity or in this situation the company. The company has several levels and each part is responsible for one part of the operation or company.

The highest level are the owners of the company, the shareholders. The shareholders approve or disapprove the vision of the company and ofcourse the achievements of the company.

Just below that is the Board, in which the board members create and explain what the company is doing and what has to be achieved. They decide about what could be called the grand strategy. They design the vision of the company or what the company should be like. They translate the company achievements into the numbers. And finally they represent the owners of the company.

Just below the board are the CEO, CFO, COO and the CIO. At this level the company is managed on a daily basis, they are the ones responsible for the strategy which strategy is to be chosen and implemented. They create the main direction of the company and explain it to the next level.

The next level are the business units, if a company has several main products. On the next level are the divisions, these are the factories or offices of a company around the world. The next level are the departments, these are for example the sales, marketing and production departments of the factories or offices. And finally the lowest level are the people who do the actual work. The last four levels do the actual job and give an implementation of what actually has to be done.

The comunication between all levels has to be structured and has to be rather intensive to assure that the understanding is correct and that all have a strong commitment towards the company. A kind of responsebility has to be created towards the central management so that all parts are forced to pay attention to the company as a whole and not only to the interests of their own division. It should be avoided that one of the parts of the company start view themselve as an island.

Principels of Strategy

The management has to consider the following 6 principels in the creation and execution of strategy. These 6 points will deliver a guide to make the chosen strategy more succesful. The 6 principels for the creation of strategy are:

The right goal has to be chosen, it should always deliver superior long term return on investments.

It should deliver a value proposition or set of benefits, which should be different for what the competitors have to offer.

The strategy should be reflected in a distinctive value chain, to establish a sustainable competitive advantage. The activities should be different or have to be executed in a different way.

The strategy should include trade offs in the product and value chain. In other words some products, services and/or features should be abandoned or foregone in order to be unique.

The strategy should define in general terms how all elements of what company, business unit or division does fit together, A synergy has to be created and promoted in the company as a whole. All effects and side effects should be maximalised and used to the benefit of the company.

And finally the strategy has to assure a continuity of the direction, a good strategy is a long term plan which should not be changed every couple of years. This would only be a sign of weakness in the creation of the strategy and the execution would be consequently equally worse.

Conclusion

Strategy is in short the management, allocation, of resources, in anticipation of developments, towards an objective. Strategy is a delicate process which can be very beneficial to the development of a company. It will deliver a direction in which the company has to go.

A good strategy will be beneficially, internally and externally. Internally it will focus the company the reach the common objective with all levels, people, behind it. The chosen strategy is a translation how to reach the goals/vision set out by the management, board and indirectly the shareholders.

And externally it will make it easier to attract foreign capital And most importantly it will create the image of a strong company which knows what it is doing. Which will become visible at last if the quarterly results have to be made public.