What makes a good strategy different from bad one? This is the one of the most frequently asked questions that I hear during consulting projects and in classes at business schools and perhaps this is one of the most important. And this question shouldn’t be underestimated. My experience of communication with managers of different spheres shows that the number of people who clearly understand how a good strategy differs from a bad one is extremely small. This is also mentioned by American authors, for example, Richard Rumelt . There is no need to go far to confirm this thesis just look around and you’ll see how many companies are actively developing, growing and gaining leading positions on the market, and how many are barely making ends meet and closing. Obviously, the number of the first ones is dramatically low.
Some of the business schools also contribute to this sad statistics. Teaching people tools of strategic management they often do not explain the essence of a strong strategy and do not explain how it differs from weak one.
In order for you not to make the same mistake we want to share with you 9 and a half signs of a strong strategy that will help you to build strategy the right way. We’ll also discuss the typical mistakes and misconceptions that make the strategy weak or make it impossible to say that the company even has a strategy. This discussion if not guarantees then increases your chances of developing a strategy that will lead you to success on the market.
It’s not easy to formulate common signs of a good strategy because people’s nature makes them regularly invent new ways of solving problems that they face with. But at the same time they make new pratfalls and do dumb things. In both of them, people show enviable enthusiasm. Nevertheless, we tried to systematize effective approaches to strategy planning and identified some mistakes that many people make.
1st sign of a good strategy – Good strategy answer “How” questions.
The most common mistake in strategy development is equation of strategy implies and goals. Many managers believe that the development of strategies is the same as setting of goals that must be achieved by the company for a certain period. They sketch a list of goals, then bring it to their subordinates and believe that this is strategy planning. This is completely wrong. It’s essential to understand that strategy is a clear answer to the question "HOW will we achieve our goals?". Yes, without goals there won’t be any strategy, but the purpose only is not enough. If the strategy of your company does not provide clear and detailed answers to the HOW question, then the company does not have a strategy. In this case goals will most likely remain unfulfilled. Most of the people are not genius, and if they do not understand something, they certainly won’t sit and think how they can achieve their goals. Most of them will simply ignore the incomprehensible task. If it is not clear how to achieve the goals, then from their point of view, there’re no goals. If you do not make everything clear, if you do not explain everything in the most detailed way in the strategy, no one will do anything. Remember the simple rule: strategy is the answer to the question: "HOW will we achieve our goals?".
2nd sign of a good strategy – You should show you leadership ambitions.
The desire to bring the company to the top positions is one of the key signs of a good strategy. At the same time, this feature is not due to the ambitions of the company's management as is may seem but the valid logic of strategy planning. The the desire to make a company a leader sets a good pace for its development, and its business processes acquire the proper level. It helps to make clear guidelines. Obviously, proceeding from the sense of the task, it is a question of pace that outgoes the pace of competitors and processes that surpass their processes. These particular pace and processes are necessary for the company to demonstrate its growth that is ahead of the market dynamics. Leader ambitions can be different and, of course, they must reflect the reality and fully meet the requirements of adequacy. At the same time, it is certain that even if your company is just a small enterprise such ambitions should still permeate strategy. And they should be recorded in the form of goals and activities. There are good examples of leadership ambitions that may be appropriate for any company (one or several examples can be laid out in the strategy in for a particular case): market-share leadership, product leadership (technological advance), customer satisfaction leadership (measurements are based on specially created indexes of satisfaction, not to be confused with NPS-Net Promoter Score), cost leadership, leadership in speed and more.
3rd sign of a good strategy – You should be a paranoiac.
Many senior managers think that their competitors are fools and lazy bones, that they will sit back and do nothing watching the market go to the hands of their competitors that they will quietly watch how the company takes their customers and earns money for them. Such leaders believe that they are working in a some kind of vacuum, and no one will interfere their brilliant plans becoming reality. It's clear that it's not so. If your strategy does not proceed from the fact that you business competitors will interfere you business and break neck to earn every penny on the market even tearing it out of your hands, if you do not proceed from the thesis that in the course of realization of the strategy you will face the most serious and competitive opposition, if you do not have a clear answer to the question of how you will outplay your competitors, then your company has a bad strategy. Here Because you will be disturbed and you should have distinct plans what you will do with it. You should feel paranoid, constantly calculate the possible moves of competitors and provide your answers to them. If you don’t do this you’ll miss a critical strike and your strategy will go to waste. Remember: competitors are not stupid and most likely they will also take active and even aggressive actions. You must be prepared for this, calculate all possible options for the actions of competitors and in advance provide your reaction to them. And it’s even better play in advance.
4th sign of a good strategy – Concentrate.
Even the strongest person will be defeated if they begging a fight with many competitors. They will simply be crushed by the masses, despite of their strength. And the opposite a person with average abilities defeating competitors one by can win a whole crowd. The same is in business. If you plan to play against the whole market, you will not win. A good strategy means that you are playing against a particular group or even a single competitor, knowing that such a statement raises your chances of success and will allow your company grow, take a bigger share in the market and become stronger so then you can move on to more powerful competitors and set to work on them. This thesis, of course, does not mean that you can not attack immediately the strongest of them, of course you can, if you think that you have enough recourses for this. But what you shouldn’t do is breaking right up against the whole crowd. Another formulation of this advice is: a good strategy is also focused on choosing priorities. You are a good strategist, if you can separate the most important from the secondary, you know how to give up the insignificant goals in favor of achieving those that will predetermine your victory. Remember that you are chronically suffering from a shortage of resources, so you should use them wisely; achieve exactly those indicators that are really important.
This thesis also includes the strategies of "refusal of competition" or blue ocean strategy. But you can’t refuse the competition with someone abstract you always refuse to compete with someone specific. It’s replaying due to transferring to other spheres.
5th sign of a good strategy – Minimize depending on others.
Forget the thesis that people are the key value of your business. This is a naive view to the realities of business. Experienced and wise leaders and HR-managers know that this is completely wrong - people should not be the main value of your business. Because if you put it this way, it means that you are a slave of your employees, you depend on their whims and goodwill, and do whatever it takes to keep them. In this case, you can’t even doubt that employees will begin to dictate their will to you and it will have nothing in common with the goals you want to achieve. People are a resource, one of the three main types of scarce resources. And this is exactly how you need to take your staff this approach will allow the manager to create a strategy success of which is minimally dependent on the loyalty, abilities and whims of specific employees. There is nothing wrong or immoral in this interpretation, it does not mean that you should contemptuously treat them, show disrespect, lack of attention and etc. It's exactly the opposite, you have to remain a person that people want to work with, they should appreciate the opportunity to be under you. But the necessity to create a comfortable and interesting atmosphere for staff, however, should not be the main point you should remember that the higher your dependence on specific people in your team, the higher the probability that your strategy will fail. People are not robots they have many weaknesses. The moment one of the key employees start behaving differently from what you expect of him it's just a matter of time. People’s nature is contradictory and inconstant. If your strategy is based on the fact that its success depends on a particular person or a number of people, then you dig your own grave. The clever strategist acts loves people, but does not believe in them (but keeps it a secret!). He is developing a strategy that minimally depends on specific people, which provides a high degree of survival even in cases when people behave inadequately.
6th sign of a good strategy - You create an effective business model.
This, perhaps, is one of the most valuable pices of advice I can give you. You have a good strategy, if its integral part is to create an effective business model. As we agreed above the strategy is the answer to the how question. So, the answer to this question implies not just a list of activities that will make you achieve your goals. It's also the answer to the question how your company will make money, doing it more cleverly and efficiently than competitors. Know if you expect to overtake your competitors, earning money the same way as they are but just working more you won’t be successful. Successful companies come up with more efficient way to work. And you, as a smart strategist must think in this direction: how to produce cheaper than competitors, how to produce more qualitatively than competitors, how to be able to survive in market conditions that are unbearable for competitors, how to promote more efficiently than competitors, how work faster than competitors. These and other issues require the closest attention in the development of the strategy. If the business model of your company does not turn into a more efficient than the competitors’ one due to the realization of the strategy, such a strategy is not complete, it will not be able to provide you with a stable superiority over competitors. The next sign is about the need for such superiority.
7th sign of a good strategy You achieve superiority over your competitors.
Superiority over competitors is not a competitive advantage it is the result of skilful use of existing competitive advantages, which provides your company with an advance in comparison with competitors in business-relevant areas. Possessing a competitive advantage and realization your superiority on its basis is not the same thing. For example, you can achieve the lowest cost due to access to cheap raw materials. Cheap raw materials themselves are not a guarantee of the lowest cost price, because you may not have technologies that allow you to produce inexpensively or there is no adequate cost management. But as part of the strategy, you build a series of events that turn this competitive advantage into superiority over competitors. Or you already have your own proprietary developments, potentially they can turn your product into the most advanced in the market. These developments are the competitive advantages of your company. But in order to achieve real superiority over competitors, you have to work hard. Implementation the development in real production for achieved superiority over competitors on their basis should become an essential part of your strategy. The interpretation of this thesis as the division of competitive advantages and superiority over competitors isn’t typical for strategic management. Often these two concepts are confused. I strongly recommend you to distinguish one from another, this will make your approach to strategy development much more conscious. Competitive advantage is the basis that you can rely on, this is your potential. If you can realize it you’ll gain superiority over you competitors. If not, there won’t be much sense out of your competitive advantage. Russia, in this sense, unfortunately, is a good example of the validity of this thought. Having many competitive advantages in comparison with other countries: huge amount of natural resources, a big population, a developed science, nevertheless, it still can’t achieve superiority over the competitors in significant areas. A good strategy is always about superiority. By exceeding competitors with significant characteristics, your company is ahead of them in the market. So, if you are a good strategist, then a significant part of your strategy is devoted to how to turn existing competitive advantages into superiority over competitors in areas relevant to your business.
8th sign of a good strategy – By concentrating you differentiate to survive the hard times.
Strategic differentiation should not be confused with the marketing differentiation that Jack Trout wrote about in his work on positioning . In this case it is a completely different matter. In the strategic sense, differentiation is understood as the creation of such business model of the company that is resistant to external shocks and is able to develop and grow even in unfavorable external conditions. Usually we are talking about reduction of dependence on one market, one product or other important factor which is reducing the risks associated with such excessive dependence. This can be achieved through systematic work aimed to enter other markets, preferably with a different macroeconomic model than the native market (for example, if the native Russian market is extremely sensitive to fluctuations in hydrocarbon prices, then another target market should be little dependent on the price situation for this commodity group ). In this case, the fall of one market will be compensated by the presence of another market and will not become fatal for the company. Also, differentiation is carried out by means of purposeful expansion of the product porftolio, i.e output of new products to the market, that is not related to those products that provide the company's main financial flow. The reasons are the same - excessive dependence on one product can lead to a catastrophe in the event of a sharp decline in demand or prices for it. The crisis of recent years has clearly shown that most Russian companies did not think at all about differentiation. Strong strategists always think about darksome times and build a safety net in advance even when the market is expected to grow!
9th sign of a good strategy – Always have Plan B.
As you probably know, strategic planning should be scenario-based. This means that the management team must determine the various scenarios for the development of important for the company events, market dynamics, key external and internal factors, and build their strategic logic based on these scenarios. There are should be minimum 3 or better 5 and more possible scenarios: the main (realistic), optimistic, super-optimistic, pessimistic and super-pessimistic. Under this approach the strategy becomes flexible and viable because the company has plan of actions for various circumstances. But not everything is obvious. Often the scenario turns into the adaptation of strategic goal for different scenarios. A certain level of goals is set for the main scenario, and then, depending on the other scenarios, the values of these goals are adequately increased or decreased. For example, market growth is expected in this scenario the goal is sales growth, in another scenario there is even more market growth so the sales target is synchronously increasing. If scenario emanate from a smaller market growth the goal for sales is decreasing, and so on. This logic works for almost all types of goals. The described approach has a significant flaw - the developer of the strategy actually puts the company's dependence on external circumstances. If everything is fine the company will develop at a decent pace, is everything is bad - the company, at best, will cease its development. And the developer of the strategy has to agree with this!
The concept of multivariance issues from the scenario and gives it the correct strategic meaning. It is aimed to eliminate the incorrect dependence of strategic thought on external circumstances and to force the developer of a strategy to think how to achieve the set goals under any external conjuncture. Put it bluntly, the company’s task not to passively reflect on external circumstances, but to achieve the goals taking into consideration these circumstances. This means, for example, that the "heavier" the scenario, the more activities are envisaged for achieving the set goals. The goal in this case usually remains unchanged or provides non-critical adjustments. Because of multivariance there are always reserve plans for achieving the goals. They are an integral part of the strategy.
Speaking about strategy multivariance has one more important interpretation. The rule of good strategic tone is to have several parallel concepts (groups of events) that lead the company to achieve the goals. This is due to the well-known axiom that any strategy already has an error at the stage of its development and no one knows what it is exactly. That is why it’s recommended to implement different concepts simultaneously, each of them will allow to achieve the goals. In the process of implementing, it becomes clear where the error was and it helps define the correct concept that becomes the main one. For example, when planning, you put in 1.5 times more events than required to achieve the target sales volume. Doing this you know that some of them will not work but you don’t know which ones. So additional options will allow the company to achieve the desired goal. Of course, this understanding of the multivariance should not contradict the strategic requirements for concentration and must proceed from the limited resources available to the company.
9 ½ sign of a good strategy - You should think about a possible sale of the company .
The consequence of the strategy implementation should be the growth of its value. This last feature is not so much an indication of the strategy itself but an important strategic concept that a good strategist must keep in mind. Even if you do not think about selling your company, you should always create such an opportunity. A good strategy and skillful business is skill of creating (yes, it is creation!) and using opportunities and, consequently, you must create the opportunity to sell the company at a good price. Whether you use it on occasion or not it's up to you. But it is not far-sighted to deprive yourself of such an opportunity beforehand, without even thinking about it.
Hence some practical pieces of advice that I can give to an attentive reader.
Firstly, during the development of the strategy, determine the approach to measuring the value of the company. There are many of them and it is not guaranteed that a potential customer agrees with the one you have chosen your priority. But, nevertheless, you initially need a clear benchmark and a clear valuation technique. Our favorite is the method of discounting cash flows, which determines the value of the company as the sum of future profits for the stipulated number of periods discounted to the current day. As a guide, I lay the amount of profits for 7 years, someone can increase this time, someone reduce. This is a matter of taste and bidding with a potential buyer.
Secondly, in general your strategy should be aimed at increasing profits, not revenues. If during some of the years while planning you allow a decline in profit, then it must have a clear strategic justification and be compensated by the profits of future periods. The main thing that needs to be understood is that the investor most often buys the future profit in other words they want to receive income, pay back the costs of acquiring your company and earn extra. Of course, someone will object it, citing as an example numerous Internet companies that for several years do not bring profits, while showing a huge revenue, and they are sold/bought for a lot of money. However, the purchase of such companies is very rare, and it is still conditioned by the investors' expectation of profit in the future, which should grow out of the impressive size of the company. If in the future such a company is unable to convert its large revenue into sizable profit, it will inevitably be deflated, like any market bubble.
Thirdly, while negotiating a sale the key is the ability to prove to a potential buyer that the predictions you make about the expected profits in the future are accurate and will come true with a high probability, i.e. the key to increasing the value of the company is the seller's ability to demonstrate a reliable analytical model. This is a model of the market, as well as a system for forecasting the results, which shows the company's business model, in comparison with the predicted results of business models of the competitors. Demonstration of such a model and system as well as their performance during previous periods significantly increases confidence in the seller's predictions about expected future profits. Accordingly, your company needs a system for collecting statistical data and regular adjustment/improvement of this system. The methodology of how such analytical solutions are created itself is described in detail in my book on strategic analytics.
Of course, in this article I have not described all the signs of a good strategy. There are others. But everything can’t be stated in one article. The remaining signs, perhaps, I will set forth in a separate article.
 Richard Rumelt in his book "A Good Strategy/Bad Strategy". Publishing House “Mann, Ivanov and Ferber”, Moscow, 2014.
 Jack Trout "Positioning: The Battle for your mind", Publishing House "Peter", St. Petersburg, 2007.