Explaining Business Strategy

Feb 23, 2016
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What is Business Strategy?


What is strategy? Strategic thinking and strategic management involve viewing the “big picture” of the organization and devising ways to get all levels of management to buy into the strategies. Historically, human resources was rarely considered to be part of the team of strategic managers, but that is beginning to change. For this change to continue, human resources must understand some basic tenets of strategic management.

Strategic management involves three basic assumptions:

  • Companies and the competitive environment in which they operate are dynamic in nature
  • The formulation of strategy and its implementation must be completely connected
  • Strategic leaders must take an active role in implementing their strategies

Human resources is often not consulted when management develops and implements the strategic plan. But rather than waiting for an invitation to contribute, HR professionals today are increasingly asking to be involved because they are more cognizant of their potential role as a partner in this process. To maximize their contributions, HR professionals must understand and become well-versed in each of the following steps. First, analyze the vision and mission of the organization and ingrain them into the HR consciousness. Next, study the organization’s specific goals and objectives. Third, recognize that the strategy is developed based on the organization’s goals and objectives. Last and perhaps most important, ensure that the strategy is implemented effectively and efficiently.

Strategy Is Active and Multi-Dimensional

For human resources to be an active partner in the organization’s strategic planning, there must be sufficient knowledge about the multiple aspects of strategy and financial concepts. As seen below, many aspects of strategy are financially based. In their book, Strategic Management (Prentice Hall, 2009), Mason Carpenter and William Gerard Sanders said there are five dimensions of the business strategy diamond.

The first dimension and fundamental basis for strategic planning is economic logic. Economic logic is the overall core for strategy or decision-making at the organizational top level. It involves characteristics such as lowest costs through advantages, premium prices due to unmatchable service, etc.

On the perimeter of the strategic-level diamond are the remaining four dimensions:

  • Arenas. Where is our focus? What product categories? Which value-creation strategies? Which market segments?
  • Vehicles. How will we get there? Internal development? Joint ventures? Alliances?
  • Differentiators. How will we win? Image? Customization? Price? Speed to market?
  • Staging and pricing. What is our speed and sequence of moves? Speed of expansion? Sequence of initiatives?

Vision, Mission, and Strategy

Successful organizations align their vision, mission, and strategy. To ensure that this occurs, an organization should first ensure that its vision and mission wherein the organization’s values and fundamental purpose for existence are developed. Next, the organization should incorporate its strategic goals and objectives, which must be specific in nature and have measurable outcomes. Measurable outcomes often means quantitative instead of qualitative analysis. This book will help human resources understand some of these critical metrics, i.e., what they are and why they matter. These metrics will include numerous items such as financial ratios and other quantifiable measures. Last, the strategy itself is developed and implemented. Again, ideally, there is an organizationwide assimilation of this strategy and it is not solely imposed from top management.

Business Strategies

Michael Porter is a well-known strategic management researcher and writer. His theories of generic strategic positions are well-accepted in both the academic world and by businesses. According to Carpenter and Sanders, Porter developed the following options:

  • low-cost leadership;
  • differentiation;
  • focused cost leadership; and
  • focused differentiation.

Human resources must be acutely aware of the organization’s positioning since this choice drives many financial decisions within the organization.

Low-Cost Advantage Financial Concepts
The costs associated with this strategic focus will be discussed later in the book but are worthy of mention here. They include fixed costs, variable costs, marginal costs, average costs, and economies of scale.

Differentiation
Often a company’s products or services are accepted if its customers are willing to pay a premium for certain product or service features. This willingness to pay a higher price means the company must sustain a financial gap between the price and the costs of producing the product or service.

Regardless of the positioning chosen (i.e., low-cost leadership, differentiation, focused cost leadership, or focused differentiation), each company will fall into one of three categories regarding its relationships with its competitors. The company will either be a first mover, second mover, or fast follower. When an organization is a first mover, the organization undertakes more risks than its competition since it is the first organization to aggressively carve out market share for itself. If the organization is a second mover, then the opportunities for excessive profits are lower compared to the first mover but there are fewer risks involved in going into that particular market. Fast followers make up the majority of companies; they recognize the economic opportunities in quickly entering that particular market, and they carve out a segment of the market for themselves after the product or service has a proven level of demand from consumers. Again, this strategic decision will ultimately have financial ramifications.

Return on Your Investment

As an HR professional, what can you expect to gain from reading, understanding, and incorporating business literacy concepts into your career? What would be your expected return on this investment?

  • Respect from peers and decision-makers within your organization
  • Enhanced promotion opportunities
  • Understanding of the future financial stability of your organization
  • Knowing the growth potential for your organization relative to its competitors
  •  Better decision making skills
  • Stronger understanding and appreciation of strategic decisions made by top management
  • Understanding of cash management
  • Knowledge of where fraud, waste, and abuse can be minimized
  • Insights of what upcoming major legislative changes may impact your organization
Excerpted from Regan W. Garey, Business Literacy Survival Guide for HR Professionals (SHRM, 2011).
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