Phases of Strategy Development and Associated Tools

Content

1. Introduction

2. Phases of Strategy Development and Description of the Associated Tools
2.1. Phase One: Market Analysis and Added Value for the Customer
2.2. Phase Two: Determining the Market Position of the Company
2.3. Deriving of Priorities and Objectives
2.4. Implementing and Tracking the Strategy

3. Conclusion

4. Bibliography

1. Introduction

According to the author own experiences observations and surveys as a manager and consultant, German companies do not deal consistently with strategic management. If at all in private and public companies, single, independent tools are used (such as the SWOT analysis) for the development of strategies. Frequently the relationship between these tools is unclear to the managers (at least on the lower management levels). A coordination of the strategic activities between corporate levels is inadequate. In everyday life, already made strategic decisions remain partly unconsidered or they are even counteracted by operating activities.

This article presents that companies can effectively use strategy development when it is not a series of individual tools but a seamless process, passing the results from one phase to the next. This process must take into account the relevant data (internal results, market data, environmental developments) in the form of numbers, facts and figures, and it also needs to be structured in such a pragmatic way that it can be followed and performed by a (management) team. It must also be transformed as a tool to practice, forming the basis for everyday and extraordinary decisions (e.g. should we deal with this problem now, or are there currently more important things to do?).

The tools presented in this article have been tested and developed by the author and his colleagues over the past twenty-five years in many strategy development workshops. In these workshops the author has accompanied different companies and organizational units of companies in developing and implementing strategic priorities. In general, these were companies with running business operations - i.e. not start-ups. They were companies of different sizes, in different industries and with varying product spectrums. Some of the companies are for-profit organizations (FPOs), others are non-profit organizations (NPOs). During the accompaniment of the companies the experience was made, that the basic principles of strategic management are very similar in both types of companies. The basis for the development of a suitable strategy is less a question of what return on capital or what profit is to be achieved, but rather a question of what value for the customer is to be created. This applies to FPOs and NPOs alike.

2. Phases of Strategy Development and Description of the Associated Tools

As varied as the companies are, so varied is also the process of strategy development. Nevertheless, the analysis of the different approaches makes it possible to recognize and describe individual phases that are performed in a similar manner again and again. Each phase includes a set of tools, which may be selected and used specifically for each situation. The individual phases are described in the following. For each phase exemplary tools, which are available for selection, are presented.

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Figure 1 shows the phases and graphical images of tools that can be used in the phases.

2.1. Phase One: Market Analysis and Added Value for the Customer

The first phase of the strategy development process is headed “Market Analysis and Added Value for the Customer”. The task of the phase is to analyse the target market and to identify the added value that the company can offer its customers. The starting point of the strategy development is thus outside the organization. This approach is called “The Strategy from the Outside In” by George Day and Christine Moorman. “When they design their strategy, they start with the market, not the other way around. They use deep market insights to inform and guide their outside-in view. Their outside-in strategy focuses every part of the organization on achieving, sustaining, and profiting from the customer value“.^[1] The outside-in view first considers the market that the company wants to reach with its products and services. How is this market developing, to what political, economic, social, technological, legal and environmental forces is it exposed and what opportunities and risks arise for the company?

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With the help of PESTLE Analysis the market can be examined regarding its external chances and risks. PESTLE stands for p olitical, e conomic, s ocial, t echnological, l egal and e nvironmental (see figure 2). It is a strategic planning technique that provides a useful framework for analysing the environmental chances and risks for an organization. Using detailed questionnaires, the market is scanned according to the factors listed in table 1.

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The results of this analysis form the basis for the next steps of the strategy development.

In the following must be analysed which competitors are operating in the market, using which market strategies to conquer their customers and what market shares are accounted to these competitors? Are new competitors expected to enter the market because, for example, they are attracted by high profits?

What is happening in the industry? What topics are dominating the market and what changes can be seen on the horizon? How do our own products compete in the market? How high is the risk that new products or even completely new technological approaches will replace them? How do the suppliers behave and how powerful are they?

The next consideration applies to clients and potential clients. Is it about consumers or business customers? How many customers are in the market and how much volume can be sold in the market? What is the customer structure? Is it more a buyer's market or a seller's market? What game is being played in the market and who are the winners so far?

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Figure 3 shows the five forces of M. Porter. The five forces include the intensity of rivalry among existing firms, the threat of new competitors entering the market, which, amongst others, depends on existing entry barriers, the bargaining power of suppliers, the bargaining power of customers, and the threat that new products or services are brought to the market, which will replace current products or services.

The five forces represented affect the company from outside. This allows us to determine the structure of the market or, more precisely, the industry. Companies of the same industry manufacture products that can substitute each other. The stronger the threat of these five competitive forces, the more difficult it is to achieve a sustainable competitive advantage. With the help of its strategic alignment, the company may prevail against the forces. The model assumes profit motive and is only partially applicable to non-profit organizations.

In addition to the customers and suppliers, there are a number of other stakeholders which need to be included in the analysis. For each stakeholder the expectations should be determined and it needs to be examined to what extent the company will and can meet these expectations. Conflicts between the expectations of different stakeholders need to be identified and there are decisions to be made on how to deal with these conflicts (see table 2).

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Among the stakeholders are the owners or shareholders whose needs must be considered. For corporations and foundations the supervisory boards or advisory boards have the task of representing the interests of the owners or responsible bodies. For public companies other bodies are added, which - among other tasks - monitor the financial needs or the fulfilment of the mission.

The employees are another important stakeholder group. Strategy changes are likely to affect the organization of the company. Often the employees are directly or indirectly affected. The early notification and involvement of employees and their representative bodies (works council or staff representatives) facilitates in many cases the subsequent implementation of changes.

The most important step of this first phase of the strategy development process is the determination of the value for the customer. The question needs to be answered, on what the customer is willing to spend his or her money today and in the future. The Austrian-American scientist and author Peter Drucker emphasizes that the purpose of a business is not to make profit. The purpose of a business is always outside the company in the society. And there is only one purpose for a company: It has to find or create customers for its products and services. A company satisfies customer needs. These needs may be have been known to customers for a long time. But it could also be that the customer didn’t know of his or her need, until the company brought its innovation to market. Only the willingness of customers to pay for a product or service, converts it into wealth for the company and its stakeholders. The product or service must be worth more to the customer than the money that he or she has to spend on it. The value of a product or a service for a customer depends on what it does for her or him.^[2]

Treacy and Wiersema show that the entire operating model, i.e. the structure and the processes, is based on the added value that the company provides to its customers. The operating model consists of the processes, the systems, the education of employees and the corporate culture. These factors must be aligned to the generation of added value for the customer. The two authors have identified three different value disciplines. Each discipline produces a different kind of customer value. The value discipline is the implicit promise a company makes to its customers to deliver a particular combination of values, e.g. price, quality, performance, and so on.^[3]

The first discipline is operational excellence. Companies that pursue this discipline provide standard quality products at an unbeatable price. The added value for the customer is simple: Low price with no-frills and trouble-free service. Little attention is paid to the innovation of new products and services. The German retailers ALDI and LIDL are good examples of this value discipline. In many publications this market strategy is also described as cost leadership.

The second value discipline is called product leadership or sometimes technology leadership. Product leaders concentrate on offering the best products or services in the market. The decision whether a product is better than others is not made by the producers themselves but by the customers. Technical aspects are not always in the foreground. It may also be, for example, the best design or the easiest handling of a product. It may also be a service that delivers everything from a single source and which the customer does not need to care about. The proposition to the customer is to sell him the best that he can get on the market. To keep this promise, product leaders have to innovate year after year, product cycle after product cycle. Apple, for example, is a product leader in smart phones and tablet computers. Porsche is a product leader in sports cars and sport utility vehicles ( SUVs).^[4]

Customer intimacy – sometimes described as customer leadership – is the third value discipline. Companies that follow this discipline specialize in satisfying unique needs of specific customers. Their proposition is to choose the best available products for their customers and to help them to derive the maximum benefit from these products. Thus, they help their customers to remain or to become successful in their own markets. In order to select the best products, customer leaders cultivate close relationships to their customers. Often they understand the customer´s processes just as well as the customers themselves (or sometimes better). Typical examples of “businesses” that follow this strategy are doctors or consulting companies.^[5]

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^[1] Day and Moorman (2010), p. 4

^[2] see: Drucker (2007), pp. 36 - 37

^[3] see: Treacy and Wiersema (1995) p. xii

^[4] see: Treacy and Wiersema (1995) p. xiii

^[5] see: Treacy and Wiersema (1995) p. Xiii