Business Strategy Tools

There are many helpful business strategy tools. The positioning school of strategy formulation offers strategy tools to focus on strategies to help business best position themselves. The concepts and tools below are largely founded on the writings from two of Michael Porter’s books – Competitive Strategy (1980) and Competitive Advantage (1985).

The “five forces model” outlines the driving forces within any industry. These include:

In his book Competitive Strategy, Michael postulates that for any industry, there are really only four different “generic” strategies that companies can pursue.

Cost Leadership Strategy

• A cost leadership strategy is a broad one and is focused on being the lowest-cost producer for an industry.

Cost “Focus” Strategy

• A cost focus strategy focuses on a narrow market segment and involves developing lower-cost products or services for that target segment.

Differentiation Strategy

• A differentiation strategy is broad strategy one that involves making your products or services different from and more attractive than your competitors.

Differentiation “Focus” Strategy

• A differentiation focus strategy is a strategy of developing unique products or services for a smaller market segment.

Michael Porter identifies what is called a “generic value chain” – one of the important business strategy tools available. In the operational model below, we see reference to primary and support activities. Primary activities are those employed directly to develop and service products for customers. The support activities help to enable or sustain the primary activities (e.g., human resource management).

Primary Activities

• Inbound logistics: the receiving, warehousing and distribution of materials to produce products
• Operations: the production of the finished products are performed
• Outbound logistics: the warehousing and distribution of the finished products
• Marketing & sales: the marketing and sales of the finished product
• Service: support provided to customers

Support Activities

• Procurement: the purchasing of materials to produce product
• Technology development: R&D, IT and other technology development activities
• Human resource management: recruiting, development and compensation
• Firm infrastructure: finance, legal, QA, etc.

This model is one of several business strategy tools intended to help businesses to determine competitors’ courses of action. There are four categories of analysis that help.

What Drives the Competitor? (Motivation)

• What are their goals?
• What is their culture like?
• What organizational structures do they have in place?
• What are the backgrounds of the leadership team?
• What is their business philosophy?
• What are their external constraints?

What are the current plans and actions of your competitor? (Actions)

• How does your competitor create business value today?
• Where is your competitor investing today?
• What relationships does your competitor have?

What are the assumptions of your competitor? (Assumptions)

• What do they believe are their strengths and weaknesses?
• How do they see their culture?
• What do they value?
• How do they look at competitor forces within the industry?
• What do they believe their competitors are going to do?

What is your competitor capable of? (Capabilities)

• What is their ability to create competitive products and services?
• How strong are their distribution channels?
• What are their marketing skills?
• What patents and copyrights do they have?
• What is their financial strength?
• How good is their leadership?

Boston Consulting Group (BCG) developed what is referred to as the “BCG growth-share matrix” to help large corporations determine what businesses they should invest in (or not) to maximize their profits. The matrix a business strategy tool to help companies know where to invest.

Star

Star businesses are those tin markets with high growth rates and where business have high market share. If a market is a star, that means it is growing quickly. In this case, a corporation may need to invest heavily to maintain their lead.

Cash Cow

A business unit that is in the cash cow sector has a large market share in a mature, slow growing industry. Little investment is needed here and profits could be used to invest in other businesses.

Question Mark

This is a business that has a small market share in an industry that is growing quickly. This is typically a high risk high reward situation. Question mark businesses require investments

Dog

This is a business that has a small market share in a mature industry. Typically, dog businesses are liquidated.

Game theory is another business strategy tool that involves strategic decision making. To survive and compete, businesses need to consider the likely plans and actions of their competitors.

Generic Steps The generic steps in game theory include:

• Defining the goal or problem
• Identifying critical decision factors (costs, price, product differences, location)
• Defining various scenarios
• Analyzing the various scenarios
• Formulating a final strategy

For a good overview of game theory click here.

Strategy Group Analysis helps to:

• Identify the competitors and understand how they compete
• Define how one might successfully compete

Michael Porter (1980) developed this business strategy tool or concept called “strategy group analysis.” This is integral to his overall system of strategic analysis. Strategic group analysis involves identifying and analyzing group of companies within an industry that are competitors, and then determine how to best compete.

The key is to successfully identify organizations with similar competing strategies, and then looking at their strategies – see examples below:

• Branding
• Distribution channels
• Enabling technology
• Geographic coverage
• Market segments
• Marketing
• Pricing
• Product diversity
• Quality
• Vertical integration

• Strategy Development Models

Business Strategy Tools

By David Willden