| Can you define exactly what makes up a business | | | | competitors. |
| strategy? Some people say no, but we think you | | | | In our experience, differentiation is about being the |
| can. | | | | best at something. This should be encapsulated in |
| In fact, we believe a valid business strategy has five | | | | your mission statement - what are your company's |
| components: | | | | aspirations and how are you going to beat the |
| | | | competition? We just talked about how Southwest |
| 1. Your company's current or desired core | | | | Airlines differentiates -- what are you going to offer |
| competencies | | | | customers that will make them choose your products |
| 2. A description of how you will differentiate vs. | | | | or services so that you can grow your business? |
| competitors | | | | It takes a lot of hard work to come up with a great |
| 3. The industry or industries in which you intend to | | | | answer to this question and even more work to |
| compete | | | | make that differentiation real. It's easy for us to say |
| 4. The initiatives you plan to implement in the areas | | | | that Southwest is the best low-cost airline in the US, |
| of marketing, operations, information technology, | | | | but it's extraordinarily difficult for them to pull it off. |
| finance and organizational development | | | | The third component of a valid business strategy is a |
| 5. A financial forecast that shows how your plans will | | | | description of the industry or industries in which you |
| meet stakeholder requirements over the next 3 to 5 | | | | intend to compete. |
| years | | | | You need to be able to define just what kind of |
| Let's look at each of these components. | | | | company you are - are you a furniture manufacturer? |
| The first component of a valid business strategy is a | | | | A gift card retailer? A consulting firm, a bearings |
| clear description of your company's current or desired | | | | distributor, a toy importer, etc.? This step sounds |
| core competencies. | | | | easy but we find that companies are often so |
| You may be thinking, "Great, but what's a 'core | | | | concerned about getting too narrow in their focus |
| competency?'" While there are many definitions, | | | | that they fail to become really clear about what they |
| here's a good one from Wikipedia: | | | | want to do. A company with a good business |
| "ACore competency is something that a firm can do | | | | strategy will have thought through these issues and |
| well and that meets the following three conditions: | | | | made the hard decisions necessary to clarify its |
| - It provides consumer benefits | | | | identity. If it has, it can easily pass the litmus test of |
| - It is not easy for competitors to imitate | | | | identifying the industry or industries in which it |
| - It can be leveraged widely to many products and | | | | operates. |
| markets. | | | | The fourth component of a business strategy is the |
| A core competency can take various forms, including | | | | set of initiatives you plan to implement in the areas |
| technical/subject matter know how, a reliable | | | | of marketing, operations, information technology, |
| process, and/or close relationships with customers | | | | finance and organizational development. |
| and suppliers. It may also include product | | | | These are the plans that guide your company's focus |
| development or culture, such as employee | | | | and resource allocation over the next several years. |
| dedication." | | | | If your business strategy is specific enough to be |
| For example, we could say that Southwest Airlines is | | | | relevant, you will have detailed plans in all of these |
| a reliable airline that offers low fares. But in order to | | | | areas. |
| provide those benefits, it has to have certain "core | | | | The fifth component of a business strategy is a |
| competencies," important capabilities that enable it to | | | | financial plan that forecasts the results you expect to |
| have low fares and to be reliable. We believe that | | | | get from your plans and illustrates how they will |
| Southwest Airlines has four core competencies that it | | | | meet stakeholder requirements over the next 3 to 5 |
| executes so well that it regularly beats all other US | | | | years. |
| airlines in terms of profitability. | | | | Your strategic planning process cannot be separated |
| These core competencies are: | | | | from your annual budget process. In the vast |
| - The lowest operating costs per plane | | | | majority of companies, if it's not in the budget, it |
| - An economical point-to-point airport network | | | | doesn't exist. That's why you have to have a very |
| - A fanatical culture focused on customer service and | | | | senior financial person on your strategic planning |
| cost savings | | | | team, preferably the CFO. During the planning |
| - An ability to keep planes in the air more of the time | | | | process, your team must compile a financial plan that |
| than its competitors. | | | | estimates the results of implementing your strategy. |
| Southwest airlines couldn't offer the benefits of low | | | | This plan needs to earn the approval of your |
| prices and reliable service if it didn't master these | | | | company's management and board and should be |
| core competencies. What key benefits do you want | | | | reviewed on a regular basis to track results and |
| to offer your customers? What core competencies | | | | make refinements. |
| do you need to master to provide them? | | | | So - those are the five components of a valid |
| The second component of a valid business strategy | | | | business strategy. Good luck planning your success. |
| is a description of how you differentiate vs. | | | | And succeeding because you plan. |