Three Critical Factors of Business Strategy

The strategist’s challenge is to simultaneously manage three critical factors: values, opportunities and capabilities. In order to devise and execute a successful strategy, you need to analyze each of these factors to understand how your organization can create and sustain value. The various tools summarized in The Strategist’s Toolkit can help to paint a complete picture of your organization’s competitive landscape.

Step 1. Define Your Values

Values refer to the mission of the organization. Understanding and establishing your organizational values is a critical first step in devising a successful business strategy and understanding how you can create value for others. Your values define your ambitions and the competitive space in which you operate. Your values help delineate what you will and will not do to achieve your mission. To better define your organization’s values, you might consider and answer these questions:

1. Define your mission. What is the organization’s purpose, its reason for existing?
2. Establish your scope. In which markets do you operate — in terms of product and geography?
3. Identify your aspirations. What does success look like now and in the future?
4. Know others’ expectations. Who are the organization’s stakeholders, and what do they expect of the organization?
5. Declare your values. What do you expect of the organization? What values and beliefs do you want the organization to hold?

Considering these questions will help you begin to identify competitive positions that create value for stakeholders. After all, strategy formulation is not done on a blank slate. Your mission and values define your opportunity set and help you understand how to leverage and build your capabilities.

Bill Gates of Microsoft set out to create the world’s greatest software company. That simple statement defined Microsoft’s aspirations and the scope in which it operates. Google says they will “do no evil,” declaring a value set that constrains and enables specific strategic actions. Conducting a Stakeholder Analysis can be very useful in understanding what others expect of you and may be influential in helping to define your own values for the organization. Ultimately, your values serve as boundary conditions for your strategy.

Step 2: Explore Competitive Opportunities

Opportunities refer to the possible competitive positions in the market to create value for stakeholders. To define them, you could take the following steps:

1. Define your industry. What is the arena in which you are competing with others? Who are your competitors? What customer needs do they satisfy?
2. Analyze the market structure. What competitive approaches prove superior? How does the structure of the market in which you are operating affect that competitive dynamic?
3. Identify market trends. How is the industry evolving? What are customers demanding now and in the future?

You need to think clearly about the economic, technological and societal environment in which your organization operates and acutely consider the activities and capabilities of your competitors. Each of the three tasks identified above requires attention and analysis. Defining your industry and competitors is deceptively simple, but it can be greatly informed by a full competitor analysis, environmental analysis, five forces analysis, and competitive life-cycle analysis.

Step 3: Identify Your Capabilities

Capabilities refer to the organization’s existing and potential strengths. These ideally fuel the organization’s strategic efforts. To evaluate an organization’s strategy, you need both a clear picture of what makes the organization distinctive and a sense of the organization’s ability to marshal resources and leverage capabilities toward desired organizational objectives. This requires, of course, clarity about those capabilities:

1. Define your value chain. How do you deliver value? What capabilities do you (or your organization) currently possess? What makes them distinctive?
2. Assess alignment. Do your capabilities complement one another? Are your capabilities aligned with your external value proposition?
3. Identify competitive advantage. Are these capabilities unique, and do they provide the basis for a competitive advantage? Are they easily imitated by others?
4. Analyze sustainability. Are your capabilities durable over time? What capabilities does the organization need to possess in the future? How can they develop them?

Tackling these questions can be informed by an extensive capability analysis. A capability analysis can help you identify sources of competitive advantage and highlight critical gaps in your current capabilities. Other tools such as strategy maps can be useful in highlighting your position versus rivals and to answer whether your capabilities are unique.

Step 4: Integrate Your Insights

These three factors converge in the organization’s competitive position, where value for an organization’s stakeholders is created and sustained. Ultimately, developing effective business strategy is an integrative exercise. It involves looking through a wide lens at the organization. Whereas the functional areas of an organization — finance, marketing, accounting, operations, human resources — often bring specific paradigmatic views to bear on organizational problems and considerations, business strategy is about how all the underlying insights of these disciplines are brought together. Managers do not typically encounter challenges as isolated, atomistic problems with narrow disciplinary implications; rather, they must navigate issues that encompass a whole range of complex, cross-disciplinary considerations.

Business strategy is also integrative because its success involves value creation for its investors, employees, customers, suppliers and support communities. Commonly invoked business axioms like “maximize shareholder returns” can be useful to the extent that such shorthand phrases imply value creation for investors by way of creating value for all key stakeholders — creating goods customers want, work environments that energize employee contributions and so forth. Maximizing shareholder value is not a strategic direction, nor is it exogenous to creating value for customers, employees or communities. Strategy involves putting these considerations together to align stakeholder interests and create value in an integrative and sustainable way.

Use an integrative, enterprise perspective to think clearly and to exercise sound judgment that creates long-lasting value. When successfully implemented, an effective business strategy can help an organization fully realize its potential.

Darden Professors Jared Harris and Mike Lenox are authors of the book The Strategist’s Toolkit (Darden Business Publishing).