The Right Way to Develop a Business Strategy

Recently, I had a company ask me to help lead a strategic planning process. Whenever I hear someone say “strategic planning process,” I have to fight a reflexive tendency towards skepticism. My problem, as you might imagine, is not with strategic planning itself. Strategy development is essential to building any successful organization; it is the most important thing a business does. It is also an intellectually stimulating process that I enjoy. 

The reason I have to fight an urge to respond skeptically isn’t due to an aversion to strategic thinking but rather to all the stuff that most people have in mind when they talk about “strategy planning.” I get these flashbacks of overpaid consultants in boardrooms talking about vision journeys and spirit animals (yes, I have literally sat through such a session). Those sorts of processes do not constitute strategic thinking, and the results of those methods rarely form what I would consider a coherent strategy.

It is precisely these misguided attempts at “strategic planning” and the abundance of bad advice about strategy in general that confuses so many startup founders. A simple Google search on “strategic planning for business” returns many results that illustrate my point. This article from The Hartford (an insurance company) on strategic planning for small businesses was the top result on my Google search. I read the entire article, and I can tell you it’s not good (shame on you, Hartford). What it does offer is a ton of buzz words like “mission,” “vision,” and “SWOT analysis,” as well as a handy, dandy downloadable template.   

It is probably wise to start by equipping you with the necessary skills to spot a lousy strategy. All of these concepts are routinely touted as either being a strategy or being part of a strategy. They are neither. 

A good strategy is NOT:

• a mission or vision statement
• your values
• a list of your goals 
• a to-do list
• OKRs or KPIs
• a downloadable template 

What is a Good Strategy?

I recently refreshed myself on Richard Rumelt’s aptly titled Good Strategy / Bad Strategy. If you need to develop a strategy for your business, I highly recommend reading his book and Michael Porter’s classic, Competitive Strategy. Pretty much everything else out there you can ignore. 

Rumelt’s book does a fantastic job explaining, in easily accessible terms, what constitutes good strategy and how to avoid the common mistakes that lead to bad strategy. He explains that a strategy is a coherent and highly focused set of analyses, judgments, policies, and actions that address a well-defined challenge.

Developing a strategy requires that a leader intentionally design a plan to address a particular challenge given a specific set of parameters. A strategy isn’t your goals or your mission. It is a well-thought-out and structured plan that outlines how to achieve those outcomes given the realities of your circumstances.

Rumelt provides us with a helpful framework for identifying a good strategy. According to him, all good strategies follow a logical structure he terms “the kernel.” The kernel of a strategy must include:

• A diagnosis of the challenge
• A guiding policy
• A coherent action plan

That doesn’t mean there is no place for goals or mission statements in developing a strategy. They simply should not be confused with the strategy itself. Goals, mission statements, and the like articulate your desires and aspirations. A strategy is your specific plan of action given the present circumstances of achieving those desired outcomes. You must know what you’re attempting to accomplish to develop a strategy. But those goals you’re aiming for are not the strategy, but rather the outcome of a well-executed plan. 

The Diagnosis

The diagnosis of the challenge is the most overlooked (and even avoided) aspect of strategy. Most of us prefer to talk about our goals or aspirations but not about our challenges. Instead, great strategists start by honestly identifying the challenge that must be overcome. After all, if there is no challenge to overcome, then you don’t need a strategy in the first place. 

A good diagnosis of the challenge requires simplifying your complex reality into the most essential and salient point. Then, as Rumelt says in his book, you have to answer the question, “what’s really going on here.” More specifically, you have to identify that which stands between you and your goals. Finally, and most importantly, you have to be brutally honest about the nature of your challenge and not sugarcoat the facts. 

Examples of a good, specific, precise diagnosis are:

• There are well-established and well-capitalized incumbent competitors that we must displace to hit our growth goals
• Our customers’ needs are evolving, and our products aren’t as good of a fit for many of them as they once were
• A new upstart with better technology is routinely taking business away from us
• Increased competition from low-price providers is starting to put pressure on pricing and squeeze our margins

Guiding Policy

Once you’ve diagnosed the real obstacle between you and your desired outcomes, then you can confidently move forward with designing a guiding policy to address it. The guiding policy is the overall method or approach you plan to pursue in overcoming the identified challenge. 

Developing an excellent guiding policy requires you to invest the necessary time researching and studying all the contributing factors involved in your challenge. You must create a deep understanding of the circumstances you’re facing by accurately identifying the strengths and weaknesses of both you and your competitors as well as any other essential parameters or contributing factors (such as regulatory environment, economic conditions, etc.). 

For example, if your competition has a lot more capital than you, then identify that as their strength and a potential weakness of yours. That will be important in evaluating the best policies you could pursue. A great guiding policy leverages your strengths directly against your competitors’ weaknesses while correspondingly insulating you from their strengths. In the above example, trying to compete directly on price might require extra consideration since your competition could undercut your prices, even at a loss, for longer than you could survive. 

Additionally, a guiding policy must force you to specify what you’re not going to do. In other words, an excellent guiding policy should be highly focused and provide appropriate constraints on your actions. A guiding policy should also be simple to understand and articulate to your stakeholders. Finally, it should reduce overall complexity by narrowing your focus and concentrating your resources on those areas where you have the best opportunity to succeed. 

Examples of a good guiding policy:

• We will focus solely on being the best option for small business customers who value personalized customer support. 
• We will shrink our product line to only the three products we believe we can be best in class at, and we will concentrate all R&D investments on improving and supporting those products. 
• We will focus only on serving enterprise customers within the professional services vertical who value functionality and reliability more than cost savings.

Coherent Action Plan

You now have a clearly diagnosed challenge and a thoughtful yet straightforward guiding policy that leverages your strengths and exploits your competitors’ weaknesses. The last component of a well-developed strategy is a coherent action plan based on your guiding policy. Here is where the rubber meets the road and where you begin identifying the specific acts that will carry out your policy. 

This action plan should NOT be a simple to-do list or a random list of priorities. The actions must be feasible steps you and your team can take to put your policy into motion based on your resources and other circumstances. Most importantly, they must also be highly coordinated actions that support, reinforce, and build on one another. It is important to make sure that the action plan you create is achievable and realistic yet ambitious enough to ensure your guiding policy is actualized. 

Bringing It All Together

Now let’s combine all of this to demonstrate how a basic strategy might look. For this example, I will lay out a simple scenario and then identify a corresponding strategy. Of course, I won’t belabor things by speculating on all the research required to develop the strategy (competitive analysis, SWOT, external circumstances, etc.). Still, you should get a good idea of how to construct a reasonable strategy. 

Scenario:

• We are a startup offering a B2B SaaS solution that helps automate certain back-office functions for businesses. Let’s assume it is something ubiquitous to most businesses, such as a customer relationship management tool. Well-established, large competitors that have long-standing relationships with customers dominate the industry. However, most of those tools are generic, and there are not many options on the market that focus on the unique needs of certain types of businesses. 

Diagnosis:

• There are well-established and well-capitalized incumbent competitors that we must displace to hit our growth goals.

Guiding Policy:

• We will focus solely on being the best customer relationship management tool for small business owners within the hospitality and services industries who value personalized customer support and who want to limit the time spent learning and managing technology. 

Coherent Action Plan:

• Establish a customer advisory board made up of small business owners who work with the Product team to help them better understand and empathize with their unique needs 
• Filter and prioritize the product roadmap based solely on the needs of small businesses
• Invest extra time and resources towards developing uniquely high-value features that appeal specifically to small business owners within the target industries
• Prioritize integrations with other applications popular among target customers
• Invest in better customer implementation support and training 
• Offer ongoing customer support tools designed to limit the time spent on troubleshooting technical issues by business owners 

As you can see in the scenario above, the components of a great strategy build upon one another. Accordingly, it is essential to invest the necessary time and research to truly understand all the circumstances and variables impacting both you and your competition. That isn’t something that can typically happen in a single afternoon planning session. 

Once you truly understand the scenario, you can honestly diagnose the most significant challenge that threatens your ability to achieve your goals. Then, leveraging your strengths against the weaknesses of your competitors, you can design an intelligent guiding policy that a coherent set of actions can then effectively enact. That is what makes up a good strategy, and a good strategy is the best way to improve your odds of achieving your goals.