1.Financial perspective
This step may not seem to have much to do with strategy, but it is important to determine the value of success quickly. Why? Because, in simple terms if the venture can’t deliver significant returns, it may not be worth the risk, and you have to ask yourself if it is worth continuing with your business. In this scenario you complete a reverse income statement. You start by defining how much profit you want to see at the end of a certain time period, and then determine the amount of revenues needed to generate that profit and the costs to deliver that profit. Do the numbers add up and make sense? The goal here is to be objective, if the expected revenue is not sufficient to generate your required profit at the end based on an estimate of costs, don’t simply fudge the numbers and assume you can reduce costs or increase revenue. Be diligent in your assessment.
2.Understand the industry and competition
In step 2 you are going to assess your industry and the competition. This basically comes down to assessing 5 factors:
Understanding who your competition is including factors such as competitor strengths and weaknesses, market position, pricing, new product development, advertising, marketing and branding. You should determine how you compare to your competitors.
Assessing the threat of new entrants into the industry (which may include you) and any potential reactions from existing companies. There are basically 6 barriers to entry you can evaluate: economies of scale, product differentiation, capital requirements, cost disadvantages, access to distribution channels, government policy.
Assessing the threat of substitute products (existing or future) that can place a ceiling on pricing.
Assessing the bargaining power of suppliers who can increase prices, lower the quality of products or limit the quantity of supplies one can purchase. This all has an impact on profitability.
Assessing the bargaining power of customers who can force down prices or demand better quality, more services and play you off versus a competitor.
3.Understand the Customer Perspective
In step 3 you assess your customer. This is a key step, get it wrong and you may not be able to recover. In fact, the customer value proposition and how it translates into growth and profitability for the company is the foundation of strategy.
Start by asking your self a couple basic questions: To achieve my vision, how must my customers look? Who are the target customers that will generate growth and a profitable mix of products/services?
Next, ask yourself what is the value proposition which defines how the company differentiates itself to attract, retain and deepen relationships with the targeted customers? There are basically 3 value propositions or disciplines that you can choose from:
Cost leadership – In this discipline you choose to provide the best price with the least inconvenience to your customers.
Product leadership – In this discipline you offer products that push the performance boundary (i.e. newer and better than competitors).
Best total solution – In this discipline you deliver what the customer wants, cultivate relationships and satisfy unique needs. In this case, you may not be the cheapest or the newest, but the total package you deliver to the customer cannot be matched.
In order to help you determine which of these value propositions you decide on, you may want to work through a value chain: 1. Determine your customer priorities 2. Determine the channels needed to satisfy those priorities 3. Determine the offering (products) that are best suited to flow through those channels 4. Determine the inputs (materials/knowledge etc) required to create the product 5. Determine the assets/core competencies essential to the inputs (ask yourself, in order to satisfy my customer at which processes must I excel? For example, product design, brand and market development, sales, service and operations and/or logistics).
4.Finish the business model
The business model shows how all the elements and activities of a business work together as a whole by outlining how the business generates revenue, how cash flows through the business and how the product flows through the business. By this time, you should understand the revenue capability of the business, how the industry works and your competition, who you customer is, what you are going to offer them and how you are going to offer it. By drawing a flow chart that shows how these activities are linked together you will understand how the business activities flow to generate projected profit, which you determined in step 1. This is also a good step to see if something is missing in your analysis.
5.Construct the business plan
By the time you get to this step most of your work is done. If you are looking for financing, a formalized plan will have to be completed. If you do not need financing, simply make sure the preceding tasks are documented so that they can be reviewed and changed as time progresses (strategy is an ongoing process, not a one time task).
6.Learning and growth perspective
In this last step, you ask yourself how/where the organization must learn and improve in order to become and remain successful. For example, determine the skills, capabilities and knowledge of employees needed, the technology needed and the climate and culture in which they work.
