A number of business people have approached me lately to discuss their strategy. This may seem like a fairly straight-forward request. However, I’ve learned to probe deeper until I know what is meant by strategy.
Merriam-Webster tells us strategy is a careful plan or method for achieving a particular goal, usually over a long period of time. Ken Favaro, writing in strategy+business, defines business strategy as the result of choices made to maximize long-term value. The primary difference between the two definitions is that Favaro ties the result of strategy execution to increased long-term value of the business.
Strategy can be applied in many areas of a business.
Management can develop a competitive strategy, a marketing strategy, a financial strategy and so on. What ties each of these strategies together is whether they lead to long-term increase in business value. If long-term value does not increase, the strategy is a failure.
All too often, I find business owners engaging in strategy sessions without a clear understanding of the two critical elements of 1) thinking long-term and 2) measuring results using a value yardstick.
I know a substantial business whose executives recently decided they needed a strategy to increase referrals. They decided to hold quarterly wine-and-cheese receptions for accountants and other professionals who they thought might provide referrals. The annual budget for this plan is $45,000, or a little more than $11,000 per quarter.
When asked how the strategy was working, management replied that they had many people turn out for the receptions, that the attendees seemed to enjoy themselves and that they believed they created much good will. When asked how many referrals were obtained and how many referrals became customers, no one knew.
It turned out that host staff was not even trained to talk to attendees about why they should refer to the sponsoring firm. It seems almost laughable that a significant sum of money would be spent without any idea of the return on investment. I assure you that this is not an unusual occurrence.
Similar events occur every day when business owners commit to a strategic plan without thinking through the goal of the plan or how its effectiveness will be measured.
Let’s use advertising and marketing strategy as an example. There are three ways to increase sales: You can increase the average purchase made by a customer, you can increase the frequency at which your customer buys, you can attract new customers.
Decide which of the three approaches you want to emphasize. Then decide the level of increase needed to produce a profit above and beyond the cost of the campaign. Finally, determine how you will measure the results.
Although there may be acceptable exceptions, the desired results should be permanent in their nature. Merely pulling future sales into the present, or cannibalizing future profits with low, low prices, will not create an increase in long-term business value.
Think strategic. Think long-term. Think value.
Bowser@BusinessValueInsights.com. Dan Bowser is president of Value Insights, Inc. of Durango, Chandler, Arizona, and Summerville, Pennsylvania.
