The Need for Strategic Plans - dummies

By Stephen L. Nelson

Here are some useful starting points for constructing your strategic plan. First off, the way that you’re using the word strategy is very likely wrong because you aren’t talking about strategy at all. Michael E. Porter, a Harvard Business School professor, identified that practically speaking, only three basic business strategies exist:

  • A cost strategy

  • A differentiated product or service strategy

  • A focus on a niche strategy

Cost strategies

Successful retailers rely on a cost strategy. Firms such as Walmart and Costco excel at providing products to their customers economically. They pass along a lot of the benefits of this economy to their customers in the form of lower prices. Not all the cost savings get passed along to the consumers, however. A significant portion of the cost savings, achieved through incredibly efficient operations, are retained by the business and, therefore, become profits.

Such cost leadership or low-cost operation is one of the three basic strategies. And it’s a strategy available to any business — and particularly those businesses that have achieved economies to scale.

The key thing to note about a low-cost strategy, however, is that the firm needs to retain some of the cost savings in order to earn a higher profit level than its competitors. Thus, simply being a low-cost producer isn’t enough. A firm needs to be a low-cost producer and still be able to price products and services at a level high enough that some of the cost savings are retained as profits.

Differentiated products and services strategies

The second basic strategy is product differentiation. Product differentiators often sell a very unusual product or service. The Nordstrom department store chain is a good example of this because it offers unsurpassed service, and often (although not always), it offers a great and high-quality selection of items. Nordstrom goods cost more. But consumers happily pay the extra amount. Why? Because they get so much more for their money.

A firm that relies on a differentiation strategy competes on the basis of the special features of its products or services. The key to making this strategy work is being able to charge your customers more for those special features than the special features cost you. Differentiation needs to produce increased revenues in excess of increased costs.

Focus strategies

The focus strategy is really a hybrid of the cost and differentiation strategies. This strategy states that in some ways, a firm is really good about managing costs; and in other ways, this firm is really good about differentiating products or services.

A firm may choose to take this hybrid approach because it understands a particular audience or niche of customers or category of products; in other words, the firm can, through this focused approach, serve a particular market better than anybody else. This firm is going to be the best at serving a particular niche.

Again, as is the case with other strategies, the focus strategy must produce increased revenues that are greater than the increased cost of the strategy or cost savings (to the business) that are greater than the lower prices passed along to customers.

So who’s a focus strategy retailer? Target, for example, focuses on suburban middle-class customers by offering those consumers almost the perfect combination of cost savings and differentiated products.

Five final strategy pointers

Be sure that you understand these key points:

  • Know the three strategies. A firm can usually only have one of three business strategies:

    • Cost-based strategy

    • Differentiation-based strategy

    • Focus-based strategy

  • Pick a strategy. The first step — the step that you take before you can select appropriate tactics — is picking a strategy. From the strategy decision, all other tactical decisions follow.

  • Support the strategy with appropriate tactics. A strategic plan, obviously, must have a clearly defined strategy. Then it must identify, or enumerate, the tactics that support the strategy. It’s really as simple as that. And note this important point: The only appropriate tactics are those that support one of these strategies.

  • Stick to your strategy. The hard part of writing a strategic plan is to discipline yourself (or the firm) to pick a strategy and then stick with it. Few firms want to be disciplined to stick with a hard-core strategy of cost, product differentiation, or focus.

    It’s all too easy to slip-slide your way into a situation where you are trying to be a little of this or a little of that. Picking a particular strategy means that you forgo certain kinds of opportunities and that you say no to some customers and certain kinds of products.