When I first stumbled upon this question, I was confused because I didn’t know the six specific steps of strategy development. However, as I reflected on my own strategy development process, I quickly realized that there were indeed six distinct phases.
The six steps in strategy development are: Analyzing the five competitive forces, performing a SWOT analysis, developing strategic objectives, identifying strategies, setting policies and guidelines, and identifying specific consistent activities.
Note that nowhere does it say come up with a vision first. You may have, but that’s okay. But you don’t need that to have a good strategy.
Analyze five competitive forces
All strategy development must begin with a clear understanding of the environment in which I operate. There are logical reasons why you shouldn’t start by developing your vision, mission, and goals. I don’t know if that is possible.
Let’s use an analogy. If you were on a mission to find the coolest spot in New York and your goal was to reach No.1 Coolness Ave by the 15th of next month, you would never accomplish it. Sho. why? Because they don’t analyze their surroundings and realize that “Coolness Ave” doesn’t exist.
This may be a strange analogy. But the idea of starting out by setting a goal that you don’t know if you can achieve seems even stranger. So before we think about where to go, let’s first take a look at the well-known 5-force model.
The five forces are a concept for analyzing external factors that influence strategy. As you can see, competition isn’t the only thing you have to deal with. Strategy is also influenced by the bargaining power of buyers and suppliers and the magnitude of the threat of new market participants and substitute products.
Threat of new entrants
The threat of new entrants will influence strategy depending on how easy it is to enter the industry. Generally, the lower the barriers to entry, the more competition there will be in the future.
Barriers to entry can be obvious or very subtle. Typical types are:
- Economies of scale, or the car market
- Products that are already differentiated in the market, i.e. beverages
- Capital requirements, e.g. banking industry
- Government policy or regulation
industry competition
The next factor to consider is the current competitive landscape. Here the subject becomes very complex. Of course, the more competitors there are, the more choices customers have. However, you should analyze the market regarding the following questions:
- Does the market structure support large competitors, or are there structural issues (such as a lack of economies of scale) that prevent the company from growing beyond a certain size?
- Are there competitors with a defensible cost advantage, defensible differentiation, or focus that provides an advantage?
- Is the market growing, stable, or in decline?
- How does value creation for customers typically work? Is there untapped potential?
This list is by no means complete. If you want to deepen your knowledge, we recommend you to visit the sources. In that case, “Director of Business Strategy” Michael Porter devised the framework and published it in 1980. In his book “Competitive Strategy”, he systematically and thoroughly analyzes and provides a path to finding business strategy. This is one of his most detailed books on the subject, as far as I know.
Threat of substitutes
Substitutes for products and services also play an important role. Since this is an option for the customer, it can get in the way of charging higher rates.
The fewer the alternatives, or the more expensive the alternatives, the higher the profits for your industry.
One thing to keep in mind is that substitutions can be difficult to detect. TV and YouTube aren’t the only potential alternatives to Netflix, Disney+, and Amazon. This includes books, PlayStation, movies, theater, and even sports. What matters is the customer’s perspective. And customers turn to Netflix to fill their free time and get entertainment. Any option that meets this requirement may be a substitute and may tempt potential buyers.
buyer’s bargaining power
Customer bargaining power also determines potential business success. If your company serves large customers, and each customer accounts for a large portion of your revenue, you’re in a kind of captive situation. Larger buyers tend to demand significant discounts and additional fees.
The legal situation may also put potential buyers in a better bargaining position. Access to information, the buyer’s economic situation, and changing trends and preferences all affect the strength of negotiations with the company.
Supplier bargaining power
This section requires you to analyze the buying side of your company. Basically the same type of question as before, but only from the customer’s side.
- How much of your revenue does your supplier represent?
- What informational advantage do they have?
- What laws do I need to deal with?
Don’t forget your employees. Since they are a supplier of labor to your company, they should be analyzed like any other supplier.
Industry analysis takes a lot of time. If you are a small business, it will probably take 2-5 days. Of course, it depends on how deep you want to dig and how much information is available.
I hope you are convinced that it is worth it. If you want a discussion, see my post on “Why is business strategy important?” So I hope I can make a case for why thinking strategically is absolutely important.
SWOT analysis
After external analysis, the perspective turns internal. This means that doing an internal analysis only makes sense now.
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. The last two have already been completed. But if you don’t know what the market wants, you won’t know what its potential weaknesses are, so you need to think about those first.
However, with that knowledge, you can find the corresponding traits. This is an example of a strategy I’ve worked on for a client.
These aspects later gave rise to the following ideas:
Our strategic advantage in the market is that we have a sophisticated in-house training system for new and existing staff. This will allow him to deal with three external factors next.
1. Customers are more efficient in the field by reducing the need for on-site training.
2. The quality of your work will improve and you’ll stand out from your competitors.
3. We hope this will help reduce employee turnover, which is a major problem identified in the industry.
Remember that you need to build a strategic advantage. It never existed to begin with.
In a complete SWOT analysis, strategy almost stands alone. The reason is that key market factors usually force players in the field to do something.
By analyzing how to approach problems and take advantage of opportunities, you can automatically make choices that are appropriate for your situation.
Develop strategic goals
Once the SWOT analysis is complete, it’s time to develop your strategic goals. You must briefly describe the direction in which you intend to shoot.
This is an example of a hotel cleaning service.
In order to escape price pressure from two major customer hotels (accounting for 90% of revenue), the company will focus on medium-sized hotels with strong bargaining power. This should allow them to charge higher prices to compensate for the increased costs of differentiation.
(Just to be clear, this is just one aspect of the strategic objective; it could actually be much longer. In this case, the original contains about an A5 page of content; It consisted of three linked sub-goals.)
identify strategy
Now comes the part where you actually develop your strategy. Establish a general direction for the field you want to work on. This is where the SWOT analysis example comes into play. Building a training program can help you address threats and capitalize on obvious opportunities.
You need to aim for as few points as possible. If you can identify directions and actions to address multiple issues, you should follow that path. Because these actions have an impact. This means that even if you focus on a few things, you will have a disproportionate effect.
By comparison, cleaning services only had three areas of strategic direction.
Of course, strategies can be categorized into three general strategies, specifically Michael Porter’s. If you want to know more about differentiation, check out my article. “When differentiation strategies work best” It might just be you… 😉
Set policies and guidelines
The strategies identified will help you understand what you need to do and what you should stop doing. This is important because it connects theory to real business life.
These do’s and don’ts can usually be summarized into concise rules that can be applied to your business.
For this example, the rule would look like this:
- Our marketing and sales efforts are targeted exclusively at hotels with 120 to 200 beds.
- No employee should go to a customer without basic training.
- All cost positions must yield a reasonable profit for the company.
Of course, they may seem arbitrary to you. But in the case of our hotel’s cleaning service, they made sense (given their position at the time).
This point and the last one are straight out of Richard Rumelt’s Good Strategy/Bad Strategy. This is a book that all business owners should read. This is extremely helpful as it brings strategy work down to a very practical core.
Identify specific consistent activities
The final part is a project planning exercise. It is very important to define specific actions and link them to guidelines. If you skip this part, your strategy won’t pack any punch.
This is also the most tedious part, as you have to think through (not 100% of the time) what actions you need to perform in the real world. He always remembers the project plan, especially when he does a one-time activity to set something up.
At the end of this little guide to strategy development, I would like to draw your attention to my article on what a good strategy should include. It complements this post as it focuses on what you need to keep in mind when creating a strategy.