6.2 Business Strategy

Strategy answers three questions: Where are we now? Where do we want to be? How will we get there? Its purpose is to give the whole organisation a coordinated direction, to allocate scarce resources to the most important priorities, and to build a lasting competitive advantage — a reason customers choose this business over its rivals.

The stages form a cycle: after implementation, results are reviewed against objectives and the analysis begins again.

SWOT is most useful when it leads to strategy: using strengths to exploit opportunities, and fixing weaknesses that expose the business to threats. Limitations: it is subjective, can become a long unprioritised list, and is only a snapshot of one moment.

PEST provides the detail behind the 'opportunities' and 'threats' in SWOT, drawing on the external influences in Topic 6.1. Its value depends on identifying the few factors that really matter to the business and estimating their likely impact — not on listing everything.

The framework encourages businesses to build strategy around what they do uniquely well — and to outsource activities that are not core (Topic 4.3.2). Examples: Honda's competence in engines (cars, motorcycles, generators, lawnmowers); Infosys's competence in large-scale IT project delivery; Amul's competence in dairy procurement from millions of farmers. Limitation: competences can become core rigidities when markets change — a strength in film photography became a weakness for Kodak.

The matrix helps managers recognise the risk of each growth option. It does not say which option is best — that depends on the business's resources, the state of its current market and the competences it can transfer.

The key idea is value innovation: simultaneously offering buyers a leap in value while lowering costs, by asking which industry factors to eliminate, reduce, raise and create. Cirque du Soleil eliminated circus animals and star performers (high cost) and created theatre-style storylines, attracting adult audiences willing to pay more. Nintendo's Wii targeted non-gamers with motion controls instead of competing on graphics. In India, Zerodha created a mass market of first-time retail investors with low-cost online broking. Limitation: blue oceans attract imitators and eventually turn red.

Scenarios might cover different oil prices, economic conditions, technologies or regulations. The business can test its strategy against each, identify early-warning signs, and prepare responses — making it more resilient to uncertainty. Shell famously used scenario planning to respond quickly to the 1973 oil crisis. Limitations: time-consuming, and no set of scenarios can cover every possibility.

In Figure 4, the driving forces total 10 and the restraining forces 9, so the change is likely to succeed — but only narrowly. Managers can increase the chance of success by strengthening driving forces or, often more effectively, by weakening restraining forces: for example, reducing employee resistance through consultation, retraining guarantees and clear communication. Limitation: the scores are subjective estimates.

Note that the new product carries greater risk: there is a 40% chance of receiving only $1.0m after spending $2.0m — a net loss of $1.0m. A risk-averse business with weak finances might rationally choose the upgrade despite its lower expected value.