What is a business strategy and why is it important? | HBS online (2023)

Every business leader wants their organization to succeed. Making profits and keeping stakeholders happy are valuable goals, but impossible to achieve without an effective business strategy.

To be successful, leaders need to improve their skillscapabilitiesEset clear business goalsdeveloping a strategy that creates value for the company, customers, suppliers and employees. Here's an overview of business strategy and why it's essential to the success of your business.

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What is a business strategy?

Business strategyare the strategic initiatives pursued by a companyCreating value for the organization and its stakeholdersand gain a competitive advantage in the marketplace. This strategy is critical to the success of a business and is required before any goods or services are produced or delivered.

Laut Harvard Business School on-lineBusiness strategyOf course, an effective strategy is based on three key questions:

  1. How can my company create value for customers?
  2. How can my company create added value for employees?
  3. How can my company create value by working with suppliers?

Many promising business initiatives do not materialize because the company has not aligned its strategy with value creation.Creativity is important in business, but a business will not exist without prioritizing value.

The importance of business strategy

A business strategy is the foundation for a company's success. It helps leaders set organizational goals and gives companies a competitive edge. It determines several business drivers including:

  • Preis:How to evaluate goods and services based on customer satisfaction and raw material costs
  • Delivery:Whether materials should be sourced sustainably and from which suppliers
  • Employee recruitment:How to attract and retain talent
  • Resource allocation:How to allocate resources effectively

Without a clear business strategy, a company cannot create value and is unlikely to succeed.

added value

Developing a successful business strategy requires a thorough understanding of value creation. In the online courseBusiness strategy, Professor Felix Oberholzer-Gee, from the Harvard Business School, explains that, deep down, values ​​make the difference. For example, the difference between a customerwillingness to payfor a good or service and its price represents the value the company has created for the customer. This difference can be visualized using a tool calledvalue stock.

The Value Stick consists of four components that represent the value a strategy can bring to different stakeholders.

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  • Willingness to Pay (WTP): The maximum amount a customer is willing to pay for a company's products or services
  • Preis: The actual price of the goods or services
  • Cost: The cost of raw materials needed to produce the goods or services
  • Willingness to sell (WTS): The lowest amount suppliers are willing to receive for raw materials or the minimum amount employees are willing to earn for their work

The difference between each component represents the value created for each stakeholder. A business strategy seeks to widen these gaps and increase the value generated by the company's efforts.

Increased customer satisfaction

The difference between a customer's WTP and the price is known ascustomer satisfaction. An effective business strategy creates value for customers by increasing their WTP or decreasing the price of the company's goods or services. The greater the difference between the two, the more value is created for customers.

A company can focus its marketing strategy on increasing WTP. Effectivemarket researchcan help a business define its pricing strategy by determining the WTP of target customers and finding ways to increase it. For example, a company can differentiate itself and increase customer loyaltyIntegrate sustainabilityin your business strategy. By aligning its values ​​with the target audience, an organization can effectively increase consumers' WTP.

fixed margin increase

The value created for the company is the difference between an item's price and its manufacturing cost. This difference is calledcompany marginand represents the financial success of the strategy. A metric used to quantify this margin isReturn on capital (ROIC). This metric compares a company's operating income to the capital required to generate it. The ROIC formula is:

Return on Invested Capital = Net Operating Cost After Taxes (NOCAT) / Invested Capital (IC)

ROIC informs investors of a company's success in turning their investments into profit. By increasing the WTP, a company can risk rising prices, thus increasing the fixed margin. Executives can also increase this metric by reducing their costs. For example, in addition to increasing WTP, sustainability initiatives can reduce production costs by using fewer or more sustainable resources. By concentrating ontriple result, a company can increase customer satisfaction and margin at the same time.

Increased supplier surplus and employee satisfaction

By reducing supplier WTS or increasing costs, a company can create value for suppliers - orsupplier surplus. As rising costs are unsustainable, an effective business strategy seeks to create value for suppliers by decreasing WTS. How a company does this varies. For example, a brick-and-mortar business might partner with vendors to display their products in exchange for a discount. Suppliers may also be willing to offer a discount in exchange for a long-term contract.

In addition to the WTS supplier, companies are also responsible for creating value for another important stakeholder: their employees. The difference between employees' compensation and the minimum they are willing to receive isemployee satisfaction. There are several ways companies can increase this gap, including:

  • Pay increase:While most companies are reluctant to raise salaries, some have succeeded. For example, Dan Price, CEO of Gravity Payments,Increased the company's minimum wageFor$80,000 a yearand, consequently, had significant growth and notoriety.
  • Boosting performance:Companies can also reduce WTS by making working conditions more attractive to potential employees. Some offer remote or hybrid work options to give employees more flexibility. Some have also started offeringfour-day work weekwho often experience increased productivity as a result.

There are several ways to increase supplier surplus and employee satisfaction without sacrificing bottom line. Unfortunately, most managers are only dedicated toseven percentyour time for employee development and stakeholder engagement. However, a successful strategy creates value for everyone involved – both internally and externally.

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strategic implementation

Creating a business strategy is just the first step in this process. Implementation requires a strategyfrom formulation to execution. A successful implementation includesnext steps:

  1. Set clear goals andKey Performance Indicators(KPIs)
  2. Set expectations and ensure employees are aware of their roles and responsibilities
  3. Delegate work and allocate resources effectively
  4. Put the plan into action and continually monitor your progress
  5. Adjust your plan as needed
  6. Make sure your team has what it takes to succeed and agree on the desired outcome
  7. Evaluate the results of the plan

Throughout the process, it's important to remember to adjust your plan as you go along, butavoid second guessesyour decisions. Finding that balance is challenging but critical to the success of any business strategy.

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Learn more about creating a successful business strategy

Business strategy is constantly evolving with changes in consumer expectations and market conditions. For this reason, managers must continually educate themselves on developing and implementing an effective strategy.

One of the best ways to stay current with best practices is to take an online course like the one offered by HBS Online.Business strategyProgram. The course provides guidance on how to create a value-based strategy for your business.

Would you like to learn how to develop an effective business strategy and create value for your company's stakeholders? Discover our online courseBusiness strategy, orother strategy coursesto develop your strategic planning skills. To find out which strategy course is right for you, download ourfree flowchart.

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