The 4 P's
WHAT IS BUSINESS STRATEGY?
Business strategy is the alignment, organisation, and integration of a company’s strategic initiatives to give it a competitive advantage in its current market. It's distinct from corporate strategy in that the latter determines which industries a corporation should operate in and where to allocate assets.
While business strategy can be interpreted in several ways, it typically serves one of four primary functions, known as the four Ps of strategy:
Strategy as position: Taking a prominent position in the marketplace by establishing a clear value proposition and differentiators
Strategy as perspective: Identifying and communicating a company's overarching mission, values, and purpose.
Strategy as plans: Setting and tracking goals and strategic action plans.
Strategy as patterns of action: Responding quickly and effectively to changes in the competitive landscape
According to Harvard Business School, an effective business strategy creates value for both internal and external stakeholders; the value stick is a visual representation of this process.
The top of the stick represents the value created for customers, the middle represents the value the company captures, and the bottom represents the value created for suppliers. the value stick showing WTP, price, cost, and WTS The stick has four categories:
1. Willingness to pay (WTP): The maximum amount a customer will pay for a business’s product or service
2. Price: The amount customers have to pay for goods or services
3. Cost: The amount the company spends on producing goods or services
4. Willingness to sell (WTS): The lowest amount suppliers are willing to accept for the raw materials required to produce goods or services
To craft successful business strategies, professionals must leverage these factors to selectively pursue ideas that create value for customers, employees, and suppliers.
BUSINESS STRATEGY SKILLS
1. Creating Value for Customers It can be easy to think that charging the highest price consumers will pay is a good strategy. If customers are willing to pay more, it’s rational to charge that amount—especially if it leads to a higher profit margin. The problem is that it doesn't create value for customers. Creating value for customers requires increasing the gap between a product’s price and customers’ WTP to produce customer delight.
There are two primary ways business leaders can do so:
Decrease price: If feasible, offer a lower price than customers are willing to pay for goods and services. This will delight them and potentially capture an existing market segment of those originally unwilling to pay a higher price—similar to how low-end disruption works.
Increase customers’ WTP: Raise customers’ WTP by making the product or service more attractive to them. WTP is difficult to pinpoint because it varies between customers. Consequently, increasing customers’ WTP isn't as simple as reducing price. Business leaders need a thorough understanding of customers' different demographics and values, which can be: Extrinsic: Generally observable differences in population (e.g., age, income, education, and location) Intrinsic: Characteristics you wouldn't know without directly asking customers (e.g., risk tolerance and passion for a given subject), or "unobserved differences" Other factors: Brand recognition, legality, packaging, or recommendations from trusted sources Each factor can impact a customer's decision to choose one company over another, regardless of price.
2. Increasing Employee Satisfaction Employee turnover is costly for businesses. According to a 2019 Gallup study, the cost of replacing a single employee ranges from one-half to two times their salary. An effective business strategy should incorporate employee satisfaction to prevent voluntary turnover. The value stick framework can be applied to both employee and customer satisfaction. To create value for employees, managers should increase the gap between the minimum compensation employees will accept (or employees’ WTS) and the compensation they receive. There are two ways this can be accomplished: Generous pay: Increasing employee compensation not only lengthens the gap between their WTS and the cost of compensating them but improves employee satisfaction. Attractive working conditions: If increasing salary isn't feasible, offer better working conditions to incentivize employees to lower the minimum compensation they’ll accept. Good benefits, flexible schedules, professional growth opportunities, and remote work are all excellent ways to increase employee satisfaction without increasing salary. Knowing what your employees value is crucial to increasing their satisfaction. Ask for feedback on what they want and strongly consider it.
3. Creating Value for Suppliers are one of the most important stakeholders in business strategy. Yet, finding cost-effective suppliers willing to work with your business can be challenging. To address this, professionals responsible for hiring or working with suppliers must create value by increasing the gap between the minimum price a supplier will accept (their WTS) and the payment they receive. This is known as supplier surplus. A simple, but unsustainable, way for businesses to create value for suppliers is to pay them more. A successful business strategy creates value for suppliers without sacrificing the firm's bottom line. For example, if a supplier experiences issues with waste management and high internal costs, a business leader can consider helping them adopt lean manufacturing, a production process focused on maximizing productivity and minimizing waste. Through lean manufacturing, suppliers—and even customers—can reduce costs and save money. Consider your suppliers' goals and challenges and think of ways to create a partnership to address them. Finding mutually valuable solutions can increase supplier surplus without negatively impacting your profit margins.
4. Effectively Managing Your Firm’s Margins While your business strategy should create value for stakeholders, you shouldn't neglect profit. Effectively managing your firm's margins is vital to building an effective strategy. Your strategy should ideally widen the gap between price and cost.
There are two ways this can be accomplished using the value stick framework:
1. Increase customers’ WTP: Increasing the maximum amount customers are willing to pay allows you to raise prices accordingly without sacrificing their satisfaction. Adding more features to products or strengthening your company's brand can also achieve this.
2. Decrease suppliers’ WTS: Suppliers typically charge as much as possible to maximize profits. By purchasing in bulk or committing to future contracts in exchange for reduced prices, your firm can lower costs and continue to provide value to suppliers.
These four skills are crucial to crafting an effective business strategy. Developing them takes time, effort, and a thorough understanding of the competitive landscape. These skills aren't just for executives or top-level managers—they’re important for anyone who is or aspires to be a business leader.