Though a staple of everyday business language, managers often struggle to explain what strategy means. It is often confused with tactics and operational effectiveness – something upon which its performance is vitally dependent. Though mastering the skills of strategy is difficult, understanding the basics is not.
Military roots, Greek origin
The term was originally used to describe decisions and methods a general employed to arrange troops in a particular pattern or configuration (italics are important). Militarily, strategy has evolved to its present-day form to represent a nation’s use of all of its military resources to achieve long-term policy goals and ensure its security, e.g. U.S. policy. Sun Tzu and Carl von Clausewitz are early writers who have had great influence on the study of strategy.
Generals use strategy to wage war; commanders use tactics to win battles.
In simple terms, strategies are large scale and long-term methods to achieve goals, whereas tactics are the techniques and methods used on a smaller, more immediate scale to achieve specific objectives.
Strategy in Business
Business schools began teaching strategy in the 1960s. The attributes of military strategy – long-term, goal-directed, making the best use of limited resources, adversaries to contend with, an uncertain environment – coupled with its rich base of knowledge made it an ideal analogue for management theorists to apply to business.
As military strategy has Sun Tzu and von Clausewitz, business strategy has its leading thinkers, too: Chandler, Henderson, Drucker, Mintzberg, Rumelt and Porter. While early work on business strategy emphasized positioning, differentiation, competitive maneuvering and patterns of decision-making, recent work – particularly that of Harvard’s Michael Porter and UCLA’s Richard Rumelt – views strategy holistically.
A Definition of business strategy
Strategy is the deliberate choice of activities that, executed in a particular manner, create a unique, valuable and sustainable market position from which to achieve goals.
This definition is predicated upon four important principles:
- Activities must be different from – or performed in different ways than – those of rivals
- The particular combination and configuration of activities is what makes a strategy unique
- Value for the firm is created when a market willingly chooses its strategy, i.e. the value it delivers to them, over that of rivals, and pays a price greater than the cost of assembling its activities
- Sustainable advantage derives from the organization’s ability to evolve its strategy in the face of changing conditions to continuously maintain advantage over rivals
Though the company performs many of the same activities as its competitors (supply sourcing, products offered, distribution) it combines them in a way that is uniquely Apple. Though what makes Apple’s offerings unique can be difficult for customers to articulate, the end result is unmistakably recognized as “Apple”. At least for the present time, Apple holds a market position that has made it the world’s most valuable company, and has achieved a price premium that yields superior financial results. As Warren Buffet might metaphorically put it, Apple is a wealthy castle surrounded by a formidable moat teeming with crocodiles.
Operational Effectiveness is also key
It is one to design a winning strategy; it is another to ensure it performs. Though the activities underpinning a strategy are inevitably similar to those of rivals, good strategies work those activities are performed better than its rivals perform them. This is the essence of operational effectiveness (OE) – a core responsibility and task of management.
The most cleverly designed business strategy is destined to fail if the firm cannot marshal its resources and combine the necessary activities effectively. Likewise, a firm that is unusually effective operationally can, at best, hope to compete by achieving efficiencies.
Operational effectiveness is not strategy!
As Michael Porter has cautioned executives, however, operational effectiveness and strategy are not one in the same. It’s a common trap to fall into, yet an easy one to avoid.
- Strategy is about choosing, combining and arranging activities in a particular way to derive market advantage
- Operational effectiveness is about performing those activities better than rivals can to derive competitive advantage
The two-punch combination of strategy and operational effectiveness is what enables good businesses to become great long-term businesses.
More on OE and Execution in future blogs